Challenger sets the standard as preferred employer

Challenger has earned an employee engagement score of 88 per cent by Willis Towers Watson, the global risk consultant, which released the results at the annuities provider’s recent investor day.

The score is 5 percentage points above the global high-performing norm, and a solid 13 percentage points above the Australian average.

But while investors remain mesmerised by Challenger's strong sales growth and the stock’s hard run as demand for its core annuities product kicked in, CSLA analyst Jan van der Schalk is just as focused on the employee engagement score.

The insurance analyst is keenly aware that Challenger’s annuity product is game changing as are the impending changes to permissible life insurance products, set by Canberra for mid-July.

To him, a commercial venture is so much more than the quantum of earnings it generates: of greater importance are the quality of those earnings. 

“Investors who find comfort in the antiseptic maths of figuring out why money is made are missing out on the technicolor splendor of understanding how it is made,” he said. “Challenger’s investor day was good for new detail on the 'how'; it was a winner for the emphasis on the 'why'.

“Pride of place was the company’s 88 per cent engagement score. It takes effort, time and money to be a preferred employer, but its underpinnings are simple business logic.”
 

Low turnover

Employee turnover at Challenger is significantly lower than its peers, noted van der Schalk, who believes this is an explicit positive and sustainable contributor to an excellent expense ratio. Basically, he said, a happy work force costs less.

As he sees it, low staff turnover is key to running a great business: he calculates this to generate a 2017 earnings uplift of $4 million for Challenger - which is significant when earnings forecasts are running at $403 million, up on the $361 million achieved last year.

In 2016, Challenger’s voluntary employee turnover was 10 per cent compared to the benchmark 15 per cent in the financial services sector.

Studies show that a real total cost of losing an employee can range from tens of thousands of dollars to an estimated 1.5 to 2.0x annual salary as costs add up, according to the analyst.

“Engagement is a lead indicator of long-term success, manifested in the predictability and sustainability of earnings," he said. “Low turnover is the outworking of high employee engagement which is important as turnover is expensive: frankly, it’s more expensive than customer churn and, interestingly, it’s a variable which is totally in management’s control.

“Ironic, therefore, that we pore over market share gains/losses but fail to cost the long-term friction (and drag on earnings) of staff departures.”
 

Diversity

In van der Schalk's view, everyone has an innate sense of what is fair.

“Equality of opportunity is, in a competitive marketplace, crucial: for commercial longevity is attained through a continual process of innovation and re-invention; this requires open communication and a sense that new, or contrarian, ideas will be heard," he explained.

“Treat employees unfairly (importantly, perception is reality when it comes to ethical conduct) and this important feedback loop does not get off the ground. Long term, this hurts companies. A myopic, one-eyed, view of the world, more often than not, can get you to good: but it will never get you to great.

“While there’s a lazy comfort in an alignment of opinions, there’s neither the disruptive drive, nor seeking out of operating boundaries, which leads to growth: diversity creates this conversation. This is why, commercially, diversity matters.”

Equity backtesting conducted on ASX 200 boards shows that boards with female composition of more than 20 per cent outperformed by 2.45 per cent over the last six years, he noted.

It is also not just about Challenger’s control of employee churn.

“Challenger is moving into a new growth phase; is levered to regulatory developments in Australia, it’s invested smartly in distribution, has unveiled a staggeringly effective Japanese (reinsurance) deal and, in a rising yield environment, is proving there’s margin expansion courtesy of increased average tenor of products sold.”

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