Turning the “S” in ESG into Alpha: Organizational Health, Human Capital, and Alpha Potential
Abstract:
This paper positions Organizational Health (OH) as an underpriced intangible asset that drives superior firm performance. Defined as a firm’s operational capacity to align, execute, and self-renew, OH enhances hu man-capital productivity. Using external OH proxies such as “Great Place to Work” rankings and McKinsey & Company’s Organizational Health Index, the paper finds a measurable OH premium. Firms in the top quartile of OH deliver, on average, three times higher Total Shareholder Return (TSR) than those in the bottom quartile and exhibit lower employee turnover, resulting in reduced depreciation of firm-specific human capital. High-OH f irms also demonstrate a 4.0 % higher ROIC over a three-year horizon, trade at a higher Tobin’s Q ratio, and generate superior stock returns, confirming that markets capitalize OH as an intangible asset. Organizational Health is a causal driver of Total Factor Productivity creation. For boards, managers, and institutional inves tors, OH should be treated as an important KPI—a leading indicator of long-term value rather than a soft factor. The paper calls for future research to develop causal models that quantify the incremental contribution of OH to f irm-level performance and valuation.
