[PDF] UBS Investment Research Q-Series : Human Capital

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UBS Investment Research Q-Series®: Human Capital

Global Sustainability Q-Series

Corporate culture: Relevant to investors? 19 August 2013

Evidence suggests company culture is an overlooked input for analysis We believe company culture, although difficult to quantify, matters for value creation. A 2011 article in the Journal of Financial Economics by Alex Edmans suggests that the ‘100 best companies to work for’ in the US tend to outperform, yet human capital is a relatively under-analyzed topic. In this report we ask why should and how could investors deal with corporate culture as a driver of business?

www.ubs.com/investmentresearch

Hubert Jeaneau Analyst [emailprotected] +44-20-7568 3496

We leverage online employee surveys and UBS sector analysts’ expertise We have created an employee satisfaction indicator for 200 companies in 20 sectors, using online employee survey data from three career websites: CareerBliss, Glassdoor and Indeed. We reviewed employee feedback, to understand what drives employee sentiment, and, with the help of UBS analysts, we have drawn investment conclusions. Our methodology is detailed on page 26.

Julie Hudson, CFA Analyst [emailprotected] +44-20-7568 4632

Eva Tiffany Zlotnicka Analyst [emailprotected] +1-212-713 3475

Corporate culture in five investment themes Employee satisfaction seems to often matter to value creation. But understanding what drives employee satisfaction matters even more, in our view. We identify five investment themes on p.22: (1) companies for which a high level of employee satisfaction is an asset; (2) meritocratic cultures focused on results; (3) companies potentially under-investing in labour, endangering long-term profits; (4) cultures potentially at risk of complacency; and (5) organizational change. Companies Based on this analysis our focus companies include: ABI, Danaher and RB for their result- and efficiency-focus; 3M, Apple, Intuit, Monsanto, Novo Nordisk, Novozymes and SAP for a culture of innovation; Costco & Whole Foods for their customer & employee focus; Goldman Sachs for its risk management culture.

Table 1: Stocks in focus – We classify stocks according to five groupings, based on the analysis within. The groupings should be read as “tags”, helping to identify a distinctive feature in the organisations analysed, but not implying absence of features relevant to the other four categories. The list of stocks identified is not exhaustive therefore this should not be interpreted as a ranking of companies. Investment themes

Meritocratic culture

High employee satisfaction as an asset

Organizational change

Potential under-investment in labour?

3M, Apple, Costco, Companies in focus

Anheuser-Busch InBev,

Goldman Sachs, Intuit,

AIG,

Danaher,

Monsanto, Novo

Hewlett Packard,

Reckitt Benckiser

Nordisk, Novozymes,

Royal Bank of Scotland

Safeway, Woolworths Ltd

SAP, Whole Foods Source: UBS. Company ratings and price targets appear on p.7

This report has been prepared by UBS Limited ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 83. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Q-Series®: Human Capital 19 August 2013

Contents Executive summary

page

Hubert Jeaneau

Analyst [emailprotected] +44-20-7568 3496

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UBS methodology ................................................................................................3

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Key findings .........................................................................................................4

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Investment themes...............................................................................................5

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Human capital – what matters to which sectors? ......................................................8

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Sector results overview ........................................................................................9

Does employee satisfaction impact value creation?

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Connecting human capital to the financials ........................................................10

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In the retail and service sectors, employee and customer satisfaction are linked 12

—

Motivation, innovation and adaptability...............................................................16

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Beyond employee satisfaction – looking at corporate culture..............................18

Is employee satisfaction priced in by the market?

Analyst [emailprotected] +44-20-7568 4632

Eva Tiffany Zlotnicka Analyst [emailprotected] +1-212-713 3475

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Why is corporate culture overlooked?.................................................................21

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Refining the approach by looking at the drivers of employee sentiment..............22

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Why five investment themes?.............................................................................22

Is employee morale a leading or a trailing indicator? The state of reporting on human capital Our methodology Sector overview Aerospace and defence Autos Banks and insurance Biotechnology Chemicals Consumer durables & apparels Consumer staples Healthcare services Industrials Medical technology Mining Oil and gas Oil services Pharmaceuticals Retailers Technology hardware Technology software & services Telecom services Appendix Case studies

Julie Hudson, CFA

23 25 26 29 30 33 35 38 41 44 47 51 53 57 59 61 63 66 68 72 75 78 80 81

UBS’s Q-Series® products reflect our effort to aggressively anticipate and answer key investment questions, to help drive better investment recommendations. QSeries® is a trademark of UBS AG. We would like to thank Divya Pathak and Anjali A Anand, employees of the Cognizant Group, for their assistance in preparing this research report. Cognizant staff provide research support services to UBS. Prices and data as at close 16th August, 2013

UBS 2

Q-Series®: Human Capital 19 August 2013

Executive summary As we noted in previous reports1, human capital comes up repeatedly as a key driver of value creation in many sectors covered by UBS research, but can present analytical challenges – not least because of the lack of available data. Reviewing the state of academic research in the field of ESG, UBS analyst Julie Hudson identifies human capital as an important research gap in a note published today (Seeking Sustainability Ideas…Not under the lamp post). To explore this important, yet under-analyzed topic, we have built an employee satisfaction indicator, covering more than 200 companies across 20 sectors, by leveraging employee data from three online workplace communities: Glassdoor, Indeed and CareerBliss (see Box 1 on p.28). Combining the results derived from these online employee surveys with the insight of UBS sector analysts, we try to understand: Q

Why should investors pay attention to human capital and company culture?

How can investors grapple with human capital as a driver of business?

Corporate culture is an important, difficult, and likely under-analyzed topic

UBS methodology In this report, we try to understand how employees view their employers by using the results of three online employee surveys available on job and career community websites Glassdoor, Indeed and CareerBliss. Clearly, there are biases in these surveys: dissatisfied workers are more likely to voice their opinions, samples are sometimes limited and may not be representative of the whole workforce, and ex-employees can comment on their former employers, and therefore the survey results may not accurately reflect current employee sentiment. However, we found employee comments to be generally constructive and consistent, and view this data set as a potential source of insight, provided it is examined critically and in conjunction with other evidence. Bearing in mind the potential biases in the data, we performed our analysis in four steps: Q

Guided by our recent Global ESG Analyser survey (October 2012), we concentrated on 20 global sectors where human capital issues are deemed to be most material by UBS analysts, and on the companies covered in last year’s analyser.

For 200 companies in those 20 sectors, we built an employee satisfaction indicator by combining employee satisfaction data from CareerBliss, Glassdoor, and Indeed. To do this, we normalized the satisfaction scores provided by each website, and calculated a weighted average of the scores to reflect the underlying number of employee reviews (more details on our methodology can be found on p. 26).

For key companies in each sector, we analysed employee comments to gain an insight into the companies’ culture, as we believe what drives employee sentiment is more important than the headline employee satisfaction level.

Finally, we leveraged UBS sector analysts’ expertise to assess the results and draw investment conclusions.

We explore employees’ views on their employers through online community websites Employee comments and company scores should be viewed with scepticism Bearing in mind the potential biases in the data, we believe it is a source of potential insight

See, for example, Hudson, Employee satisfaction and equity prices, Revisited, January 2011 UBS 3

Q-Series®: Human Capital 19 August 2013

Key findings A company’s culture is difficult to define, let alone measure. But that does not mean that culture does not matter for company performance. Alex Edmans’ study of the outperformance of Fortune’s ‘100 best companies to work for’ in the US suggests employee satisfaction is an important and overlooked factor in value creation2: Q

A key reason behind the outperformance of the best places to work seems to lie in the short-/long-term conundrum created by human capital investments – often essential to long-term profit generation, but likely to hurt performance in the short term.

We find that staff morale has a very direct and identifiable impact for R&Ddriven and sales/customer-focused organizations.

Employee satisfaction matters to performance, but understanding what drives employee satisfaction matters even more, in our view, because the drivers of business and staff morale are not always aligned. Indeed, using high employee satisfaction as a proxy for a culture fostering long-term value creation can be misleading in some cases, and is likely to generate a number of type 1 and type 2 statistical errors, such as: (1) favouring successful, employee-focused companies that have in fact become complacent; and (2) not favouring companies with a strong meritocratic culture that drives value creation, but can be a drag on average employee satisfaction.

The drivers of business and employee sentiment are not always aligned

We refine our approach by identifying five investment themes linked to human capital, by leveraging the expertise of UBS sector analysts: (1) high employee satisfaction as an asset; (2) meritocracies; (3) companies potentially underinvesting in labour; (4) organizations striving to implement structural changes; and (5) cultures potentially at risk of complacency. Please see page 22 for further details.

We refine our approach by identifying five investment themes

Table 2: Corporate culture in five investment themes Investment theme

Meritocracies

High employee satisfaction as an asset

Organizational change

Potential underinvestment in labour

Potential risk of complacency

Why it matters

Result- and efficiencyfocussed corporate cultures likely to drive value creation

High employee satisfaction as a driver of innovation, customer satisfaction and/or sales

For organizations undergoing important structural changes, employee satisfaction is a key indicator to watch

Has cost-cutting become over-zealous, i.e. does it come at the expense of long-term profit generation?

Has the culture become too conservative?

Source: UBS

See Alex Edmans: Does the stock market fully value intangibles? Journal of Financial Economics, September 2011, which we discussed in previous notes, including Julie. Hudson’s January 2011 note, Employee satisfaction and equity prices.

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Q-Series®: Human Capital 19 August 2013

Investment themes We have sought to use online employee data and UBS sector analysts’ expertise to categorise corporate cultures. This is inevitably a simplification of a complex topic and is designed to aid understanding. For example, we tag some resultfocussed companies “meritocracies”; these are subjective tags and are not designed to indicate that other categories do not have meritocratic aspects as workplace motivation is inevitably a subjective issue. However, we do believe the categorisation helps investors explore the factors driving employee satisfaction and its contribution to investment performance. 1. High employee satisfaction as an asset

Employee satisfaction seems to most directly impact value creation for innovative and customer-focused companies. We identify 3M, Apple, Intuit, Monsanto, Novo Nordisk, Novozymes and SAP as having a culture of innovation that underpins their long-term prospects. For Costco and Whole Foods, we believe high employee satisfaction drives customer satisfaction, loyalty and, ultimately, sales growth. In the financial sector, we like Goldman Sachs for its culture of risk management that permeates the organization. Stocks: 3M, Apple, Costco, Goldman Sachs, Intuit, Monsanto, Novo Nordisk, Novozymes, SAP, Whole Foods 2. Meritocracies

Meritocratic and efficiency-driven corporate cultures are likely to be positive for value creation, in our view. We like ABI’s meritocratic and cost-focused culture, Danaher’s philosophy of continuous improvement, and Reckitt Benckiser’s result-focused, entrepreneurial, and highly innovative culture. Some employees will be attracted by and thrive in a very meritocratic work environment, and this is likely to drive business results. At the same time, idiosyncratic, result-focused corporate cultures are likely to be less consensual, resulting in a higher dispersion of employee opinion – something not captured by measures of average employee satisfaction. ABI stated that its own internal survey showed a high level of employee engagement, contradicting the findings of online surveys, which can be biased towards the opinions of disgruntled employees, as well as the US-bias of the data (InBev acquired Anheuser-Busch in 2008 and the US represents c37% of EBITDA). Stocks: ABI, Danaher, Reckitt Benckiser 3. Organizational change

For companies facing structural challenges or undergoing important organizational changes, relatively low employee morale is to be expected, and is, in our view, a trailing rather than a predictive indicator of financial performance. However, looking at how employee satisfaction evolves can help assess the resilience of those organizations (indeed, low staff morale may be an additional hurdle to implementing successful changes). We see employee morale as a key indicator to watch for AIG, HP and RBS. In the case of RBS, although it would need to be confirmed by further data, we view the relatively positive tone of employee comments as an encouraging sign of the company’s resilience, in the context of RBS being further down the road of transformation by late 2014. Stocks: AIG, HP, RBS UBS 5

Q-Series®: Human Capital 19 August 2013

4. Potential under-investment in the workforce

Amongst other things, lower employee satisfaction may be a sign that a company is under-investing in its workforce, sometimes as a consequence of over-zealous cost cutting. While such a strategy may enhance profitability in the short run, it potentially hurts long-term profit generation. Among US food retailers, UBS analyst Jason DeRise believes that Safeway is at a tipping point in its attempt to turn round its sales and profit trends. One option for Safeway could be to attempt to differentiate by increasing its service levels (please see DeRise’s August 2012 note, Differentiation wins). Safeway, however, state that their customer satisfaction scores are strong, which the company believes shows its employees are engaged and providing excellent service to its customers. We also highlight the work of our Australian retail analyst, Ben Gilbert, who contends that the reduction in labour investment at Woolworths Ltd has helped enhance margins in the short term, but will likely lead to a decline in customer perception and an erosion of market share (Ben Gilbert, Woolworths Ltd, Are you being served? 3 April 2013). Stocks: Safeway, Woolworths Ltd 5. Cultures potentially at risk of complacency

We believe that an important risk for successful, employee-focused companies is complacency, which can happen when an organization stops questioning ‘the way things are done around here’. We do not highlight any company in this section.

Historical performance Table 3: Investment themes, historical performance vs. benchmark Performance

YTD

Since 2012

Since 2010

Since 2008

High employee satisfaction as an asset

11.3%

40.2%

107.9%

104.7%

Meritocracies

14.6%

48.1%

65.1%

54.1%

Pot. Under-investment in labour

47.4%

26.7%

25.2%

-22.1%

Organizational change

40.2%

59.0%

7.3%

-78.8%

MSCI World

12.7%

27.2%

29.1%

-4.4%

S&P500

13.2%

29.7%

46.1%

14.4%

Source: UBS estimates, Prices as of 16th August 2013

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Q-Series®: Human Capital 19 August 2013

Companies in focus Table 4: Companies in focus Company

Market cap (lc, m)

Currency

Price

"+/-"PT

Rating

Rationale

Analyst

High employee satisfaction as an asset 3M Company

81,373

US$

115.9

128

10.44%

Buy

Culture of innovation

Jason Feldman

Apple Inc

461,450

US$

502.3

500

-0.46%

Buy

Culture of innovation

Steven Milunovich, CFA

Costco Wholesale Corp

48,748

US$

111.9

124

10.81%

Buy

Driving customer satisfaction and loyalty

Jason DeRise, CFA

Intuit

19,079

US$

64.2

7.41%

Buy

Culture of innovation

Brent Thill

Goldman Sachs

75,269

US$

160.7

165

2.70%

Neutral

Risk management culture

Brennan Hawken, CPA

Monsanto Co.

51,333

US$

95.0

110

15.80%

Neutral

Culture of innovation and focus on R&D

Bill Carroll

Novo Nordisk

553,472

DKr

985.0

1040

5.58%

Buy

Employee-focused, innovation-based culture

Andrew Whitney, PhD, CA

Novozymes A/S

66,346

DKr

209.2

161

-23.04%

Sell

Leadership in enzyme technology

Joe Dewhurst

SAP AG

70,148

€

57.1

8.58%

Neutral

Human capital is crucial for SAP's ability to innovate and compete

Michael Briest

Whole Foods Market

19,616

US$

53.0

13.29%

Buy

Driving customer satisfaction and loyalty

Jason DeRise, CFA

Anheuser-Busch InBev

118,310

€

74.0

8.12%

Buy

Lean and meritocratic culture

Melissa Earlam

Danaher Corporation

47,272

US$

66.7

15.39%

Buy

Danaher Business System driving efficiency

Jason Feldman

Reckitt Benckiser

31,800

4460.0

5210

16.82%

Buy

Result-focused, entrepreneurial culture

Eva Quiroga

AIG

69,534

US$

47.1

1.91%

Neutral

Employee morale as a potential risk to the turnaround story

Brian Meredith

Hewlett-Packard

51,123

US$

26.4

5.98%

Neutral

Multi-year turnaround story

Steven Milunovich, CFA

RBS Group

38,073

€

343.0

365

6.41%

Buy

Further down the road of transformation by late 2014

John-Paul Crutchley

Safeway

6,326

US$

26.7

-24.98%

Sell

At a tipping point, increasing service levels could help Safeway differentiate

Jason DeRise, CFA

Woolworths Ltd

40,825

33.2

32.5

-2.17%

Neutral (CBE)

Decreasing level of customer service may jeopardize market share

Ben Gilbert

Meritocracies

Organizational change

Under-investment in labour

Source: UBS. Prices as of 16th August 2013

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Q-Series®: Human Capital 19 August 2013

Human capital – what matters to which sectors? Table 5: Critical human capital issues for global sectors Importance of innovation

Focus on services and sales

Labour relations, working conditions, restructuring

Availability of skilled labour

SECTORS

Comments

Aerospace and defence

Government budget limitations may lead to restructuring. Product lifecycles may be coming down, keeping R&D costs high

•

Autos

Difficulty to restructure; 10-15% of the total workforce in European countries is involved in the auto industry. Innovation in alternative power train technologies

•

Banks & insurance

Need to lower headcount in some areas; efforts to restore staff morale post-crisis could influence competitive strength

Biotech

Human capital (scientists) as a core driver

•

Chemicals

Potential restructuring needs; human capital as a core driver (innovation)

•

Consumer durables and apparel

Ability to manage cyclicality without affecting workforce performance

Consumer staples

Ability to reduce workforce with speed; innovation as a core driver

Healthcare services

Access to professional talent the most important cost issue, but has been stable for an extended period

Industrials

Managing labour relations; increased competition from emerging markets could trigger higher R&D for Western OEMs

•

Medtech

Human capital a key part of R&D success; supply limited. Offshore manufacturing for cost control

•

Mining

Labour conflicts and potential skill shortages

•

Oil and gas

Rapid cost inflation in low-cost countries

•

Oil services

Availability and price of skilled labour

•

Pharma

Human capital driving innovation; working conditions for staff

Retail – food

Labour the highest cost, but point-of-sales staff also represent the face of the company

•

Retail – general

Customer perception a core driver

•

Software

Intellectual capital the most important resource; labour relations are key

Tech hardware

Intellectual property rights and technological strength are core drivers

Telecom

Working conditions for staff and staff cuts are material social issues

POTENTIAL IMPACTS

•

• • •

•

• •

•

• R&D productivity, ability to differentiate

•

Customer satisfaction and retention

Labour disruption, productivity, cost inflation

Competition for labour, cost inflation

Source: UBS Global ESG Analyser survey

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Q-Series®: Human Capital 19 August 2013

Sector results overview

Employee satisfaction score

Chart 1: Sectors with meaningful differences in employee morale – standard deviation and range by sector 0.35

1.2

0.30

1.0

0.25 0.20 0.15 0.10

0.8

Standard deviation Left scale

0.6

Range (max - min) Right Scale

0.4

0.05

0.2

0.00

0.0

Source: CareerBliss, Glassdoor, Indeed, UBS. Please see our methodology on page 26

Employee satisfaction score

Chart 2: Average employee satisfaction levels by sector – data based on UBS sample of companies 3.3 3.2 3.1 3.0 2.9 2.8 2.7 2.6 2.5 2.4

Sector average Average across sectors

Source: CareerBliss, Glassdoor, Indeed, UBS. Please see our methodology on page 26

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Q-Series®: Human Capital 19 August 2013

Does employee satisfaction impact value creation? In his seminal book Common stock and uncommon profits (1958), Philip Fisher, a pioneer of growth investing, argues that labour relations, and the quality of a company’s R&D and sales force, are key factors in identifying outstanding longterm growth stories. The market, he contends, is good at identifying the risk of bad labour relations but tends to overlook the long-term advantage of a loyal workforce. In our view, Fisher’s comments summarize well why shareholders should care about staff morale, and reflect our findings that this matters maybe even more in the context of innovation- or sales-driven organizations. We do not want to stretch the argument too far, however: the interests of employees and investors are not always aligned, hence the need to understand the drivers of employee sentiment to reach meaningful investment conclusions.

Markets may be overlooking the value of a loyal, engaged workforce

Connecting human capital to the financials Is there a business case for employee satisfaction, and is it pertinent across sectors? Many studies have been undertaken on the topic, and we turn to Gallup’s latest meta-analysis 3 for an overall assessment of the link between employee engagement and business outcomes. Gallup’s analysis aggregates the results of 263 research studies in 49 industries and 34 countries, and finds that: Q

Top-quartile organizations in terms of employee engagement outperform the bottom quartile on a range of operational metrics, including absenteeism, staff turnover, safety, customer satisfaction, productivity and profitability.

According to Gallup, this relationship is robust to industry and country effects. However, how (and by how much) employee engagement impacts a business is likely to vary according to industry contexts, in our view.

One pitfall would be to conclude from Gallup's results that a company should maximize employee engagement. Laurie Bassi, economist and consultant in the field of human capital, argues that the drivers of business and employee engagement are not always the same. A human resource strategy should therefore seek to align those drivers rather than maximize engagement4.

Gallup’s meta-analysis finds employee engagement is linked to key operational metrics

Better to align employee and business interests, rather than maximize employee engagement?

Chart 3: Gallup engagement survey vs. business outcomes, comparing the top and bottom quartiles (2012) Turnover

Low -Turnov er

Orgs., -65%

0 -50 -100

Absenteeism -37%

High-Turnov er

Shrinkage

Orgs., -25%

-28%

Patient Safety

Customer

Incidents, -41%

10%

Safety Incidents -48%

Productiv ity

Profitability

21%

22%

Quality (Defects), -41%

Source: Gallup, 2012

Gallup: engagement at work: its effect on performance continues in tough economic times, 2012.

http://mcbassi.com/wp/resources/pdfs/BassiMcMurrer-TalentManagement-Mar2010.pdf UBS 10

Q-Series®: Human Capital 19 August 2013

The findings of our Global ESG Analyser survey are, in a way, quite consistent with those of Gallup: UBS analysts deemed human capital to be a material issue in more than two-thirds of global sectors, but we also find that the way in which human capital impacts companies’ bottom lines varies greatly between sectors (the full results are shown on p.8). Broadly speaking, we can separate human capital issues into four types: Q

Good labour relations, as labour unrest can affect production and/or make restructuring difficult – e.g. in the auto industry, mining

Competition for scarce skilled labour can drive cost inflation – e.g. in mining, oil

Innovation as a key factor of differentiation/disruption – e.g. in chemicals, software

Employee satisfaction seems to directly impact sales efforts and customer relationships – e.g. in food retail

We leverage the UBS ESG Analyser to understand how human capital can affect companies across sectors

All these four issues can be important, but feedback from UBS analysts globally suggests that the most direct impact of employee satisfaction seems to be felt in services/sales-focused companies and innovation-driven sectors. Table 5 Understanding how human capital matters – UBS ESG Analyser survey results Human capital issues

Customer and sales focus

Innovation

Working conditions, labour relations

Availability of skilled labour

Potential impacts

Positive impact on customer satisfaction, motivated sales force driving top line growth

R&D productivity, ability to differentiate

Labour disruption, lower productivity, cost inflation

Competition for talent generating cost inflation

Examples of sectors where it most matters

Restaurants, food retail

Biotech, chemicals, pharma

Mining, autos

Oil, oil services, mining

Source: UBS, UBS ESG Analyser survey, published October 2012

Chart 4: Human capital a material factor in most sectors

Human Capital as an Asset:…

69%

Labour relations/ working conditions

59%

Staff cuts & restructuring Outsourcing & Offshoring

45% 38%

0% 20% 40% % of sectors where relevant

60%

80%

Source: UBS Global ESG Analyser (October 2012)

UBS 11

Q-Series®: Human Capital 19 August 2013

In the retail and service sectors, employee and customer satisfaction are linked In the US retail industry, a simple correlation analysis shows a link between customer satisfaction (as measured by the American Customer Satisfaction Index5) and staff morale (see Chart 5 below6). In our view, this correlation is what makes employee sentiment so important in retail and, beyond, in the service sector more generally. This idea is at the heart of Harvard’s serviceprofit concept, which links employee satisfaction to customer satisfaction, loyalty and, down the line, to revenue growth and profitability. Q

Correlation is one thing, but is there causality? Causality is hard to prove, as retailers tend to plan their labour expenses as a function of expected store sales. In an original study, academics Raman and Fisher (2011) addressed the question of causality through detailed observations at the store level, controlling for sales expectations. Their results suggest that increasing the number of employees on the sales floor (or indeed having more knowledgeable employees in a store) has a positive impact on store sales which more than offsets the higher labour cost incurred7.

So, why would companies in the service or retail sector under-invest in labour? Taking the example of retailers, the received wisdom is that labour costs are ‘the enemy’, partly because labour is often the main controllable expense. According to Zeynep Ton, researcher at the MIT, this assumption sometimes leads retailers to slim down their workforce in the wake of weaker sales figures, which can lead to a vicious circle of declining sales and customer service levels8.

Customer satisfaction (ACSI)

Chart 5: A back-of-the-envelope correlation between employee and customer satisfaction (US supermarkets and specialty retailers)

84 82 80 78 76 74 72 70 68

Publix Sam's Club Staples Office Depot Kroger

OfficeMax

TJX Supervalu

2.5

2.7

Whole Foods

Barnes and Noble Lowe's

R² = 0.45

Home Depot Best Buy Gap

Safeway Winn-Dixie

2.9

Costco

3.1

3.3

3.5

3.7

3.9

Employee satisfaction (Glassdoor company ratings)

Source: American Customer Satisfaction Index (2012), Glassdoor

http://www.theacsi.org/about-acsi/about-acsi

This was noted by UBS analyst Michael Lasser in his report, What do employees say about the hardline retailers, 27 Sept. 12 6

Please see Raman and Fisher, The New Science of Retailing, 2011

Please see Zeynep Ton, Why Good Jobs are Good for Retailers, Harvard Business Review, Jan – Feb 2012 UBS 12

Q-Series®: Human Capital 19 August 2013

Case studies: Home Depot and Tesco The link between employee and customer satisfaction may be best understood through case studies. The experience of Home Depot in the early 2000s and Tesco more recently (discussed below) both point to how much labour is key to ensuring customer relevancy in retail. Going forward, we believe rising online competition may increase the importance of employees and customer service for bricks-and-mortar (as distinct from online) retailers. Looking back – Home Depot in the early 2000s

We consider Home Depot in the early 2000s to be a good example of the potential consequences of focusing on efficiency at the expense of customer service

Home Depot’s experience in the early 2000s under then CEO Bob Nardelli is a good example of a retail company shifting focus from employee/customer satisfaction to efficiency. When Mr Nardelli took over management of Home Depot in 2000, the new culture seemingly departed significantly from the founders’ motto (“Take care of your customers, take care of your associates, and everything else will take care of itself”). In an effort to rationalize the business, staff levels in stores were cut and the number of part-timers increased, reducing the availability of knowledgeable employees in stores. Customer satisfaction subsequently declined significantly (see Chart 7). Interestingly, the share price performance of Home Depot and its closest rival Lowe’s followed a similar pattern to their relative customer satisfaction scores, although in-store labour density was of course not the only factor at play (please see on p.81 for a more detailed analysis). Chart 6: Relative share price performance (%): Home Depot vs. Lowe’s

Chart 7: Consumer satisfaction index: Lowe’s vs. Home Depot

30 20

81 79

-50

Source: Bloomberg

71 69 67

Lowe's

2011

2009

2007

65 2005

-40

Jan-12

Jan-11

Jan-10

Jan-09

Jan-08

Jan-07

Jan-06

Jan-05

2003

-30

2001

-20

Jan-04

Jan-03

-10

Jan-02

Home Depot

Source: American Consumer Satisfaction Index

UBS 13

Q-Series®: Human Capital 19 August 2013

More recently – Tesco UK following a period of overzealous costcutting

In our opinion, underinvestment in store labour has likely been a contributory factor in the trading weakness seen by Tesco’s UK retail operations which culminated in a profit warning in early 2012. Tesco had a strong track record of driving productivity improvements through its P&L, but now believes this costcutting became overzealous. As UBS analyst Mike Tattersall points out, costcutting started as a response to flat sales densities but metamorphosed into a cause of falling sales densities (please see Tesco: Make the cash register, Mike Tattersall, April 2012) – see Chart 8. The table on the right (which uses Tesco’s own figures) gives some indication of what went wrong: areas affected by staffing levels seem to have deteriorated over the years, with queues, staff helpfulness and the general shopping experience all taking a turn for the worse. Tesco’s response

According to Mike Tattersall, Tesco has committed £200m on staff (c8,000 FTE equivalent, or 4-5% of the Tesco UK workforce) to address the labour issue in its UK business. The early signs are encouraging: over the past 12 months Tesco's performance in its core grocery market (non-food remains under pressure) has improved on a relative basis. The increase in staff hours is one of many initiatives Tesco has implemented to address its trading weakness (others include new advertising agency/campaigns, re-launched entry price point ownlabel range), hence it is not possible to disaggregate the precise effect of the headcount increase. However, we would judge that the diagnosis made in early 2012 is broadly correct.

Employee density Source: Company reports

Sales density

2nd

Staff helpfulness

1st

3rd or below

Source: Company presentation

Sep-12

0.95 2002 2005 2006 2007 2008 2009 2010 2011

1st

May-12

Enjoyable shopping

Jan-12

1.05

2 1

2nd

Sep-11

1.1

1st

May-11

1.15

Queues at cash register

Jan-11

1.2

6 5

2011

450 430 410 390 370 350 330 310 290 270 250 Sep-10

May-10

1.25

2002

Chart 9: Tesco’s share price – the arrow below points to the share price drop following the profit warning in early 2012

Jan-10

Chart 8: Tesco UK – employee and sales densities

Tesco’s internal scorecard

Source: Bloomberg

UBS 14

Q-Series®: Human Capital 19 August 2013

Going forward, online retail competition may increase the relevance of customer service Focusing on retailers, UBS analyst Jason DeRise believes that in the context of rising online competition, in-store service levels are likely to be an increasingly differentiating factor for bricks-and-mortar players. Rather than cutting labour costs in order to be able to match online retailers’ prices, physical retailers should take a different tack and play to their strengths, i.e. exploit the way sales staff serve and interact with customers. Employees should continue to restock shelves and collect payment, of course, but should also be trained to ‘close the sale’. By being more integrated in the way they operate between their online and bricks-and-mortar operations, retailers have an opportunity to create a seamless experience across the different sales channels, which Jason calls a “synergistic endless shelf” for customers (Wal-Mart, Now, later and long term, Jason DeRise, CFA, 15 April 2013).

Online competition is likely to increase the need for bricks-and-mortar retailers to differentiate

UBS 15

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Motivation, innovation and adaptability Intuitively, one can surmise that motivated employees are more likely to create a dynamic environment where innovation is more likely to take place, and across our sample we find evidence that employee morale is indeed higher at companies that are seen as the most innovative (although, as stated above, correlation does not mean causality). Employee satisfaction is, however, only one part of the equation. An engaged workforce is likely to be a necessary but not a sufficient condition for driving innovation; indeed, academic research suggests investors should focus on the tangible signs that a company has a culture of adaptability.

Staff morale: a necessary but not sufficient condition to create a culture of innovation

Innovation: We find some confirmation of the link between innovation and employee morale by looking at companies identified as most innovative by four different surveys – Forbes, Boston Consulting Group, MIT and Fast Company 9 (see Chart 10 overleaf). As selecting the most innovative companies can be a subjective process, we focus on the firms that appear in at least two of the four surveys cited above (17 of the 200 companies in our sample). These firms do indeed get above-average employee satisfaction scores (3.7 versus an average of three) and score significantly above their industry peers (+1 standard deviation). Only three companies deemed innovative by at least two surveys score below their peers on staff satisfaction: ABI, Coca Cola, and IBM.

Companies identified by leading surveys as most innovative score better than peers on employee satisfaction

Motivation: In the chemical sector, employee satisfaction appears to be linked to higher levels of research and development (see Chart 11 overleaf). According to UBS chemicals analyst Joe Dewhurst, working at a company seen as a leader or centre of excellence in a specific technology, such as Monsanto, Novozymes or Syngenta, is likely to be a significant driver of employee sentiment. If employee survey indicators take a turn for the worse, this might indicate that a company is losing some of its technological edge and industry leadership, or that an R&D-led company might be at risk of derating.

A fall in employee morale could signal that a company is no longer viewed as a centre of excellence in its field

Adaptability: Although motivated employees likely help to drive innovation, using staff morale as an indicator is unlikely to fully capture what some academics have coined a ‘culture of adaptability’. Adaptability appears to be a key factor of success in volatile environments, and not just in hightech/R&D-intensive sectors10. Corporate mission statements are of little help when it comes to identifying adaptable companies: according to James Heskett, professor at Harvard Business School 11 , investors should instead focus on actual practices and behaviours.

Beyond a motivated workforce, we look for behaviours and practices that signal a ‘culture of adaptability’

http://www.forbes.com/innovative-companies/list/

http://www.bcg.com/media/PressReleaseDetails.aspx?id=tcm:12-125372 http://www2.technologyreview.com/tr50/2013/ http://www.fastcompany.com/most-innovative-companies/2012/full-list 10 See for example Organizational culture and performance in high technology firms: the effect of culture content and strength, Chatman, Caldwell, O’Reilly, Doerr, University of California Berkeley 2012 11

J. Heskett, The culture cycle, Financial Times press, 2011 UBS 16

Q-Series®: Human Capital 19 August 2013 —

At 3M, technical employees are allowed to spend some of their worktime developing their own ideas12 (Google has adopted a similar rule of 20%). J. Heskett (cited above) links this rule to the invention of the “postit note”, with several 3M employees using their “15% time” to work on a “failed” adhesive which did not stick very well but could be stuck and unstuck without damaging the paper.

3M’s ‘15% rule’

—

Another example of adaptability is allowing a healthy culture of risk, where employees can try things out and potentially fail without negative consequences. In a research report on the IT sector, UBS analyst Steven Milunovich comments on Google and Amazon being “famous for trying new things on a small scale and seeing if they take. […] One idea that turns into AdSense makes up for a plethora of false starts”, which Steven sees as a sign of “anti-fragility” (Fragility and Technology, Steven Milunovich, 19 February 2013).

A healthy culture of risk

0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 -0.05

3.50 3.40 3.30 3.20 3.10 3.00 2.90 2.80 2.70 2.60 2 or more mentions

One mention

No Mention

Employee satisfaction score (left scale) Industry adjusted score (right scale) Source: BCG, Fortune’s, MIT, Fast Company, UBS

Chart 11: In the Chemical sector, levels of R&D spending and staff morale seem to be linked R² = 0.82

16.0 14.0

Novozymes

12.0 R&D %sales

Chart 10: Companies mentioned by leading surveys as most innovative tend to score better on employee satisfaction

Monsanto

10.0 8.0 6.0 4.0 2.0 0.0 2.00

PPG LyondellBase Johnson ll Linde Matthey 2.50 3.00

Syngenta Bayer Du Pont DOW Akzo Nobel BASF 3.50

Employee satisfaction

Source: UBS, Glassdoor, Indeed, CareerBliss

3M, A century of innovation, 2002 UBS 17

Q-Series®: Human Capital 19 August 2013

Beyond employee satisfaction – looking at corporate culture Just as high levels of R&D do not necessarily mean R&D money is spent wisely and productively, employee satisfaction can also be a misleading metric, in our opinion. A recent study by leadership IQ found that for 42% of organizations in its sample, low performers were more engaged and more likely to recommend their companies than high and average performers13. Our read-through is that high employee satisfaction can be symptomatic of a low level of accountability and lack of pressure to perform. This stresses the importance of looking beyond headline satisfaction levels in order to understand what really drives employee sentiment.

High employee morale can also be driven by low performers; what we really want to understand is a company’s culture

The flip sides of employee satisfaction: Complacency and meritocracy A key risk for companies with a strong employee focus (and which are likely to score higher in employee surveys) is that they may become complacent and/or excessively risk-averse, especially in the case of established and successful firms. In The culture cycle, Professor Heskett argues that, paradoxically, success can create a sense of complacency within an organization, undermining a hitherto effective corporate culture.

A key risk for firms with a strong employee focus is that they may become complacent or overly riskaverse

Professor Heskett identifies tell-tale signs that a successful culture is drifting. One obvious signal is when an organization stops questioning its established practices. For example, a strategy of hiring mostly from within can backfire by creating a culture of consensus, limiting diversity of opinion and potentially dissenting views. Success can also lead to a primary emphasis being placed on financial results at the expense of customer focus, a strategy that is also likely to backfire in the long run. Of course, many other factors can cause the cultural engine of a successful company to stall. But what these examples show us is the potential fallacy of equating a strong employee culture with competitive advantage. In our view, a key factor in a company's sustained success is its capacity to evolve, and this depends on challenging “the way things are done here”. The corollary of this argument is that a less consensual corporate culture is not always a bad thing either. Implicitly, by focusing on companies with the highest levels of employee satisfaction, one is looking for firms with a high degree of internal consensus. But for cultures that are highly meritocratic and particularly geared toward rewarding high performers, average employee satisfaction may be an irrelevant metric. In these work environments, some degree of dissatisfaction is to be expected.

A less consensual corporate culture is not always a bad thing either

Taking the example of US diversified industrials company Danaher, UBS analyst Jason Feldman writes that “simply, the Danaher culture isn't for everyone”. High pressure and process orientation can be difficult for employees to accept, which may lead to some degree of dissatisfaction among some the workforce. Despite this, Jason believes that Danaher's culture is actually one of

https://www.leadershipiq.com/ UBS 18

Q-Series®: Human Capital 19 August 2013

its main competitive advantages. In his view, Danaher’s philosophy of continuous improvement, inspired by the Toyota Production System, is one of the primary reasons that the company has managed to successfully integrate a large number of acquisition over the last few decades.

UBS 19

Q-Series®: Human Capital 19 August 2013

Is employee satisfaction priced in by the market? Empirical evidence (based on the best firms to work at in the US) suggests that employee satisfaction is a long-term driver of value that tends to be overlooked by the market (Edmans, 2011). We believe the main underlying reason for this oversight is that investing in the workforce is often perceived as a cost rather than as an asset (though we are not suggesting that labour costs should be capitalized). While as a general rule employee satisfaction appears to be positive for value creation, we believe the analysis can be refined by understanding the drivers of employee satisfaction.

Employee satisfaction appears to be one investment indicator, but we see even more value in understanding the drivers of staff morale

We have written on several occasions about Alex Edmans’ article in the Journal of Financial Economics on the outperformance of the best companies to work for, which we consider a landmark study in the field of human capital14. Q

Edmans showed that a value-weighted portfolio of the 100 best companies to work for in the US earned an annual four-factor alpha of 3.5% from 1984 to 2009, and 2.1% above industry benchmarks. Investing since 2005 in the 100 best places to work would have earned an investor over 35% more than the benchmark, although, as could be expected, excess returns are not generated smoothly.

Interestingly, this outperformance was driven by earning surprises, according to Edmans. This supports the idea that intangible assets such as human capital may not be priced in by the market until they translate into tangible results.

Chart 12: Performance of Fortune’s best companies to work for vs. S&P500

Chart 13: Industry-adjusted performance of Fortune’s best companies to work for

The (lumpy) outperformance of the 100 best US firms to work for has been driven by earning surprises

-20

-5

-40

-10

-60 2005

2006

2007

2008

2009

2010

2011

2012

2013

2005

2006

2007

2008

2009

Best places to work

Source: Great places to work institute, Bloomberg

2011

2012

2013 YTD

YTD S&P500

2010

Industry adjusted performance of Fortune's 100 best places to work for

Source: Great places to work institute, Bloomberg

See for example Hudson, Human capital and Equity Prices, Revisited, January 2011 UBS 20

Q-Series®: Human Capital 19 August 2013

Why is corporate culture overlooked? In our view, a key reason for this potential anomaly is that human capital raises a short/long-term performance conundrum: deciding to invest in its workforce may be essential for a company’s long-term profit generation, but will likely hurt the margin (and share price) in the short run. In our view, an interesting parallel can be drawn with the superior reported long-term returns of firms with high R&D and advertising spend15, which are the source of intangible assets that are in most cases expensed, but whose importance for long-term profits may be understated.

As investments in the workforce are expensed, their importance for longterm profits may, in some cases, be under-valued

Deciding whether or not to invest in the workforce may be especially difficult for companies operating in mature markets, as they might be tempted to harvest cash at the expense of reinvesting in the business. This conundrum was very well described by UBS analyst Michael Binetti in a research report on US department stores: “In our view, the only companies in the mature department store sector that can create sustainable profit growth are companies that make hard decisions about long term investments in their assets and people – even at the risk of disappointing shareholders in the short term.”16 The corollary of this is that markets may fail to recognize under-investment in the workforce as a negative signal. As we mentioned above, in the short term, reduced spend on the workforce and R&D will likely result in higher margins. Q

Drawing from his experience as CEO of 3M, Sir George Buckley recalls the lack of market interest in declining employee satisfaction and sales from new products, at a time when margins were at record (and, according to him, unsustainable) levels17.

Looking at a more recent example, our Australian retail analyst Ben Gilbert argues that the reduction in labour investments at Woolworths Ltd has helped enhance margins, but sees this as unsustainable. In his view, the reduction in the level of service will likely lead to a decline in customer perception and an erosion of market share (Woolworths Ltd, Are you being served? Gilbert, 3 April 2013).

The corollary is that markets may fail to recognize under-investment in the workforce

15 Please see Alex Edmans, 2011, Does the market fully value intangibles?, citing Chan, Lakonishok and Sougiannis, 2001 16

Initiating US Department Store Coverage, Binetti, 10 April 2012

Financial Times, 20 January 2013, Retired 3M chief finds new life in sustainability UBS 21

Q-Series®: Human Capital 19 August 2013

Refining the approach by looking at the drivers of employee sentiment Type 1 and type 2 errors Since 1984, investing in the best places to work would have earned over 2% above industry benchmarks, which suggests that, more often than not, employee satisfaction works as an identifier of long-term industry winners. But case studies also suggest that employee morale is far from being a perfect indicator, and indeed can send investors the wrong signals. To use a statistical analogy, choosing companies with the highest employee satisfaction will generate a number of type 1 and type 2 errors. Q

Type 1 error: Selecting companies with high employee morale that have, however, become complacent.

Type 2 error: Not favouring companies with low employee satisfaction when: —

A company has a non-consensual, meritocratic culture which, we believe, drives value-creation.

—

A company has experienced significant difficulties that are already reflected in the share price. In an instance such as this, we view employee morale as a trailing rather than a predictive indicator of financial performance, but acknowledge that the evolution of employee morale can help investors assess the resilience of an organization (please see our ‘Organizational change’ theme below).

Employee satisfaction will likely generate a number of type 1 and type 2 errors: investors should look beyond this to understand corporate cultures

Why five investment themes? In surveying our analysts across sectors, it emerged that understanding the drivers of employee morale was more pertinent than looking at headline employee satisfaction levels. As discussed above, employee satisfaction can be a misleading indicator of long-term value creation. In summarizing our findings, we identified five investment themes. While this framework inevitably simplifies complex situations, we believe it can nonetheless improve the relevance of using employee satisfaction as an indicator in an investment context.

Understanding the drivers of employee morale is more useful than looking at headline employee satisfaction levels

Table 7: Corporate culture in five investment themes Investment theme

High employee satisfaction as an asset

Meritocracies

Organizational change

Potential underinvestment in labour

Potential Risk of complacency

Why it matters

High employee satisfaction as a driver of innovation, customer satisfaction and/or sales

Result- and efficiencyfocused corporate cultures likely to drive value creation

For organizations undergoing important structural change, employee satisfaction is a key indicator to watch

Has cost-cutting become over-zealous, i.e. does it come at the expense of long-term profit generation?

Has the culture become too conservative?

Source: UBS

The groupings should be read as “tags”, helping to identify a distinctive feature in the organisations analysed, but for any company referred to it does not imply an absence of features relevant to the other four categories.

UBS 22

Q-Series®: Human Capital 19 August 2013

Is employee morale a leading or a trailing indicator? For investors, a crucial question is whether employee satisfaction can be a useful and predictive indicator of investment returns, or whether it is just backwardlooking. In our view, employee sentiment clearly varies with a company’s fortunes, but staff morale also plays a role in shaping financial outcomes. In essence, the answer to this question is: it depends.

It depends…

To some extent, employee satisfaction is a trailing indicator of success. It is far more common to be happy and motivated working for a successful company which has the means to reward performance, rather than for a business facing financial difficulties. Comparing the top and bottom quintile firms featured in this report in terms of employee satisfaction18, it comes as no surprise to us to find higher satisfaction associated with higher capex levels, margins and returns on capital (all metrics being sector-adjusted – please see Chart 14 to Chart 16 overleaf).

…to some extent, employee satisfaction is a trailing indicator of success…

However, there is in many cases a virtuous circle between employee satisfaction and performance, as motivated employees tend to be more productive. We believe the market might not be fully assessing this positive feedback loop between employee satisfaction and value creation. Coming back to the results of Alex Edmans’ study, the best places to work outperformed their benchmark four years after they joined Fortune’s list. The market does not seem to react to a company joining the best places to work, but apparently responds to positive earning surprises and eventually adjusts its expectations.

…but there is often a positive feedback loop between employee satisfaction and financial performance

But a virtuous circle can easily reverse. We look for the signs of an inflection point to identify when a company’s culture might become complacent, and when high employee satisfaction starts reflecting past successes rather than adding value.

A key risk for successful companies is becoming complacent

Not surprisingly, we find that morale in changing or struggling organizations will tend to be lower. As UBS analyst Michael Lasser noted in a note on hardline retailers 19 , low staff morale may add to the challenges faced by a company, and may be an obstacle for a turnaround story to actually turn around. In many cases, this issue will be well identified by the market (see, for example, the cases of RBS and AIG), but we would advocate keeping a close eye on how employee sentiment evolves, as it can indicate the resilience of an organization and the degree to which employees buy into a change of strategy coming from the top. Finally, we also look closely at companies where margins and profitability are rising, but employee satisfaction is declining. In our view, this potentially raises a red flag that the company might be under-investing in its workforce, thereby jeopardizing long-term profit generation.

We use industry-adjusted scores to reduce industry biases

Michael Lasser, What do employees say about the hardline retailers, 27 September 12

Rising margins combined with declining staff morale raises a potential red flag

UBS 23

Q-Series®: Human Capital 19 August 2013

The charts below depict capex levels, operating margins and return on invested capital for the top and bottom quintile companies, as measured by our employee satisfaction score (all measures, satisfaction and financial metrics are sectoradjusted). Chart 14: Capex % sales, 2012 0.5 0.3 0.2 0.1 0

Source: UBS

Bottom quintile

Top quintile

(median)

(median) Source: UBS

Chart 16: ROIC, 2012 4 3 2 1 0 -1 -2

1.4 0.9 0.4 -0.1 -0.6 -1.1 -1.6

0.4

-0.1

Chart 15: EBIT margin, 2012

Bottom quintile

Top quintile

Bottom quintile

Top quintile

(median)

Source: UBS

UBS 24

Q-Series®: Human Capital 19 August 2013

The state of reporting on human capital In this report, we use community websites as a primary source of information because of the unique point of view they provide, offering an inside look into what employees think of their companies (although clearly employee comments can be biased and should be taken with a healthy dose of scepticism). Ideally, we would be able to combine and contrast this information with employee data and comments provided by companies (this is actually how this report originally started, i.e. by trying to leverage employee data disclosed by companies). Companies often perform employee surveys internally, but they rarely disclose the results or comment on the outcomes (making the results of those surveys public was one of the motivations of Glassdoor’s founders). As a result, the overall level of disclosure on human capital metrics is relatively low, as indicated by the percentage of companies in our sample disclosing their employee turnover rate (one of the key human capital metrics, in our view).

The level of corporate disclosure on human capital is generally low, but improving

Reporting practices are changing, however, and some companies are leading the way in terms of transparency and raising the debate on how employee metrics matter for investors. This improved disclosure may be partly driven by the integrated reporting initiative, which we discussed at length in our Q-Series®: What is integrated reporting? (J. Hudson, H. Jeaneau, E. Zlotnicka, June 2012). Examples of innovation in corporate reporting include SAP’s effort to link a change in employee turnover to changes in its operating profit in its latest annual report. Chart 17: An increasing number of companies disclose employee turnover rates 30.0% 25.0% 20.0% 15.0%

19.8%

20.6%

2008

2009

23.0%

23.8%

2010

2011

14.1% 10.5%

10.0% 5.0% 0.0% 2006

2007

% of companies reporting employee turnover data in our sample Source: Bloomberg, UBS

UBS 25

Q-Series®: Human Capital 19 August 2013

Our methodology An important barrier to analysing employee data is the lack of available public information, as only a limited number of companies disclose comprehensive information on their employees, and analysts have limited access to companies. Online jobs and community websites (such as CareerBliss, Glassdoor and Indeed) provide an interesting alternative. They offer users an inside look at company culture by allowing employees to rate and comment on their employers online.

Building an employee satisfaction score We leverage three leading jobs and community websites (CareerBliss, Glassdoor, and Indeed) to gain an understanding of employee sentiment across companies. All three websites, through user generated content, make available the results of online employee surveys; we have based this report on the data they carried during the first quarter of this year. Although their methodologies differ, each website provides a rating reflecting the average employee satisfaction of employees/ex-employees. Combining the data from the three websites, we build an employee satisfaction indicator. We applied this methodology to the companies featured in our Global ESG Analyser (October 2012), in sectors where human capital issues were considered to be most material by UBS analysts. We excluded companies from this analysis when there was not sufficient data available on the career websites we used. Our scale uses an average of three across sectors and 0.3 as a standard deviation. Company scores range from 1 to 5, with 5 representing the highest level of employee satisfaction. The scores should be interpreted according to this scale and not be misconstrued as absolute levels of satisfaction. To compute the scores: Q

Prior to calculating the average, we normalize each of the scores from the three websites. Each website uses a slightly different methodology, which results in differences in averages and standard deviation.

We calculate the weighted average of the three normalized ratings, according to the number of employee reviews underpinning each rating.

For non US companies, we double the weight of Glassdoor’s ratings, as Glassdoor is (out of the three websites) the one with the highest global user base.

Finally, we convert the results to a scale centred on three with a standard deviation of 0.3 across the sectors.

The company scores are multi-year averages (most reviews date from 2009 to 2012), so the scores do not necessarily capture the latest trends.

Employee comments help understand company culture In addition to the ratings, users’ contributions include a qualitative assessment of their current (or former) employer. For those companies that stood out with either high or low employee satisfaction relative to their sectors, we analyzed UBS 26

Q-Series®: Human Capital 19 August 2013

more than 100 reviews (where possible) to understand what aspects of the corporate culture set them apart and have attempted to summarise them in our sector tables. Diving into qualitative employee reviews helps put in perspective the companies’ ratings (i.e. the level of employee satisfaction). We think this is particularly important for investors, as: Q

Employees and shareholders’ interests are not always aligned. Hence, it is crucial to understand the reasons behind high or low levels of satisfaction. For example, is job satisfaction driven mostly by compensation and work/life balance? Are there incentives to perform?

This online feedback from employees/ex-employees potentially gives investors another perspective on the strengths and weaknesses of a company. For example, is the company perceived by its employees as a technology leader? Are employees taking the safety culture seriously?

Beyond employee satisfaction…

…reviews help understand the strengths and weaknesses of companies

What are the limitations of online employee surveys? Although community websites provide a very interesting (and growing) pool of information on companies, they have several important limitations. The pitfalls of using this data include: Q

Not all companies have a statistically significant number of reviews: When the number of reviews exceeds 300, we view the rating as fairly reliable. In this note, we included the ratings for companies with as few as 50 reviews, which can provide investors with an interesting data point, but can be misleading, and should be used in conjunction with other pieces of evidence.

There are potential structural biases in the ratings: One key potential bias we highlight is that ex-employees or dissatisfied employees are more likely to voice their opinion online, although generally we find employee comments to be constructive. Another clear bias is towards English speaking, computer savvy employees. Finally, there is a significant US bias to the data, which we tried to mitigate by giving greater weight to Glassdoor reviews (which are more international) of non-US companies.

The companies’ ratings available on career websites are average historical ratings: Most of those reviews start in 2009. For some companies, the most recent changes in employee satisfaction may not be reflected in those averages.

Beware of potential biases and statistical significance

Available ratings are historical averages

Despite the limitations, we view this data set as a potential source of insight, provided it is examined critically and used in conjunction with other evidence.

UBS 27

Q-Series®: Human Capital 19 August 2013

BOX 1: About the job community websites Glassdoor

Glassdoor was launched in 2008 by Bob Hohman (former president of Hotwire and part of the original team at Expedia), Rich Barton and Tim Besse. Glassdoor describes itself as a free jobs and career community that offers an inside look at jobs and companies. According to Glassdoor, what sets the website apart is the employee generated content, which includes company reviews posted by employees. Among other things, employees rate their employers from 5 (very satisfied) to 1 (very dissatisfied), and describe the pros and cons of working there. As part of its services, Glassdoor offers companies recruiting and employer branding solutions that includes JobAds and enhanced employer profiles. The profiles allow companies to tell their story in a dedicated section of the website, and the JobAds product allows companies to recruit talent that may not be aware of their company or their jobs. We were assured by Glassdoor that companies could not delete or modify employees' comments and ratings through an enhanced profile or its other recruiting solutions. In September 2012, Glassdoor had 10 million users, and 3 million reviews and ratings. The company ratings available on the website reflect the average of all reviews, but Glassdoor provided us with 2011 and 2012 ratings for a sample of companies. The companies mentioned in our report had an average of 480 ratings from Glassdoor. www.glassdoor.com/index.htm Indeed

Indeed claims to have grown to become the #1 source of external hire for employers globally. More than 100 million people each month search for jobs, post resumes, and research companies on Indeed, according to the company. Job seekers can search millions of jobs on the web or mobile in over 50 countries. Indeed was founded by Paul Forster and Rony Kahan in 2004. Indeed has over 700 employees with offices in Austin, Dublin, London, Mountain View, New York and Stamford. For more information, visit indeed.com. The companies mentioned in our report had an average of 450 reviews from Indeed. www.indeed.com/Best-Places-to-Work?from=overview CareerBliss

CareerBliss describes itself as an online career community, designed to help users find happiness in the workplace and in their career. The company was founded in 2009 by Heidi Golledge, and is privately held by recruitment company Cybercoders. CareerBliss data evaluates company reviews for the key factors that affect work happiness, including: work-life balance, an employee’s relationship with their boss and co-workers, the work environment, job resources, compensation, growth opportunities, the company culture, the company’s reputation, and the employee’s daily tasks and job control over their daily work. The data accounts for how an employee values each factor. Each review is given an average score, indicating where the company stands between one and five. The companies mentioned in our report had an average of 335 reviews from CareerBliss. www.careerbliss.com/ UBS 28

Q-Series®: Human Capital 19 August 2013

Sector overview Snapshot of the tech hardware sector Human capital materiality scorecard Labour relations, working conditions

Availability of skilled labour

Importance of innovation

Customer focus (services)

UBS Global ESG Analyser input

• Source: UBS Global ESG Analyser survey

Employee satisfaction score computed using CareerBliss, Glassdoor, and Indeed 3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2 2.0

Qualcomm

Intel

IBM

Texas Instruments

Employee satisfaction

Hewlett Packard

Ericsson

EMC Corporation

Dell

Corning

Cisco Systems

Broadcom

ARM Holdings

Applied Materials

Apple

Analog Devices

Altera Corporation

Employee satisfaction level; our scale uses 3 as the mean and 0.3 as standard deviation; data from Careerbliss, Glassdoor and Indeed websites

Source: CareerBliss, Glassdoor, Indeed

Which companies stand out in terms of employee satisfaction?

Company

Apple

Employee satisfaction score

3.5

What employees are saying Trend 2011-12

Stable

# of reviews

Pros

Cons

2547

Brand name, great products and innovation, talented colleagues with high degree of knowledge, focus on end-user experience

Secretive even internally lack of career path, competitive work-life balance

UBS synthesis of employee reviews

Source: CareerBliss, Indeed, Glassdoor, UBS

UBS 29

Q-Series®: Human Capital 19 August 2013

Aerospace and defence Human capital materiality scorecard Labour relations, working conditions

Availability of skilled labour

Importance of innovation

•

Customer focus (services)

•

Source: UBS Global ESG Analyser survey

Companies to watch BE Aerospace states that the results from online employee surveys do not reflect a full and valid picture of employee satisfaction, partly because of the relatively small number of reviews for the company, as well as other potential biases of online surveys, as described in this document. It considers employee turnover to be a better indicator of employee engagement. According to the company, its voluntary staff turnover stood at 6.6% in 2011, 7.2% in 2012, and 7.2% in 2013 on an annualized basis. Table 1: Companies that stand out in terms of employee satisfaction What employees are saying

Company

Employee satisfaction score

Trend 2011-12

# of reviews

Boeing

3.2

n/a

Lockheed Martin

3.0

BE Aerospace

Rockwell Collins

Pros

Cons

2580

Great products, highly technical, compensation and benefits, work-life balance, and stability

Bureaucratic and very slow moving company for some

n/a

3658

Flexible work schedules, benefits, good leadership development programme, good diversity and focus on ethics

Bureaucratic and very slow moving company for some

2.5

n/a

106

Exposure to aerospace projects, growing company, benefits

Work/life balance, lack of employee recognition and autonomy for some

2.8

n/a

750

Technically strong, interesting projects and products, good opportunities to learn, good working environment and flexibility

Decreasing benefits, staff cuts are affecting some employees' morale, some worry of an excessive focus on the short term

Source: CareerBliss, Indeed, Glassdoor, UBS

UBS 30

Q-Series®: Human Capital 19 August 2013

Chart 1: Employee satisfaction scores in the aerospace sector

Employee satisfaction

United Technologies

Thales

Rolls-Royce

Rockwell Collins

Raytheon

Northrop Grumman

Lockheed Martin

General Dynamics

Boeing

BE Aerospace

BAE SYSTEMS

3.4 3.2 3.0 2.8 2.6 2.4 2.2 2.0

Sector average

Source: Glassdoor.com, CareerBliss, Indeed. In light blue are companies for which there are less than 100 reviews

Table 2: Company ratings – details and number of reviews Normalized weighted average scores

Total # of reviews

Glassdoor employee rating

Glassdoor # of reviews

Indeed rating

Indeed # of reviews

CareerBliss rating

CareerBliss # of reviews

BAE SYSTEMS

2.8

1,443

3.1

4.0

517

3.5

870

BE Aerospace Inc

2.5

106

2.6

3.4

Boeing Co

3.2

2,580

3.5

1256

4.1

564

3.8

760

General Dynamics Corp

2.9

1214

3.2

4.0

404

3.6

737

Lockheed Martin Corp

3.0

3,658

3.4

1,484

4.0

864

3.7

1,310

Northrop Grumman Corp

3.0

2987

3.3

1,162

4.0

685

3.7

1,140

Raytheon

3.0

2,229

3.3

998

4.0

385

3.7

846

Rockwell Collins Inc

2.8

750

2.9

415

4.0

107

3.6

228

Rolls-Royce plc

3.0

250

3.2

165

4.1

3.8

Thales

2.8

134

3.0

4.4

3.7

United Technologies Corp

3.0

218

3.3

106

3.5

Sector average

2.9

3.2

3.9

3.7

Average – all sectors

3.0

3.3

4.0

3.7

Standard deviation – all sectors

0.3

0.2

Companies

Source: CareerBliss, Glassdoor, Indeed, UBS

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Q-Series®: Human Capital 19 August 2013

Chart 2: Evolution of Glassdoor company ratings for selected companies 3.7 3.5 3.3

Average (2008-12)

3.1

2011

2.9

2012

2.7 2.5

Boeing

Lockheed Martin

Rockwell Collins

Source: Glassdoor

UBS 32

Q-Series®: Human Capital 19 August 2013

Autos Human capital materiality scorecard Labour relations, working conditions

Availability of skilled labour

Importance of innovation

•

Customer focus (services)

•

Source: UBS Global ESG Analyser survey

Companies to watch UBS analyst: Philippe Houchois, global sector strategist It is difficult to draw firm conclusions from employee satisfaction scores, given variances in the statistical sample. For example, BMW survey results are particularly skewed towards US-based respondents, and this is not necessarily representative of its predominantly Germany-based workforce (more than 70% in 2012) and may be a drag on its score. According to BMW, in the latest groupwide employee survey performed in 2011 (85% participation rate), 82% of employees surveyed were satisfied on the whole with the BMW Group, with positive ratings given to its “attractiveness as an employer” (84%). We also note that: (1) results are fairly hom*ogeneous overall with only Daimler and Tata Motors deviating meaningfully from the mean; and (2) answers were collected over a period of four years (2009-2012). During that timeframe, these companies experienced dramatic changes in markets with periods of difficult restructuring followed by sharp improvements in operating performance, all of which can influence perception. We can only suggest a few factors to explain the differences in employee perception of their firms, such as: Q

Differences in the timing of operating performance or disruption, caused by increased pressure on employees to perform and/or make concessions.

Relative corporate pride, such as having beaten the global recession in the case of Ford or the momentum of success behind the revival of Jaguar-Land Rover at Tata Motors.

Table 1: Companies that stand out in terms of employee satisfaction Company

Tata Motors

Employee satisfaction score 3.4

What employees are saying Trend 2011-12

# of reviews

n/a

206

Pros

Cons

Well-respected brand and company, good employee empowerment and training opportunities

Mixed reviews on work/life balance and efficiency

Source: CareerBliss, Indeed, Glassdoor, UBS

UBS 33

Q-Series®: Human Capital 19 August 2013

Chart 1: Employee satisfaction scores in the auto sector

3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2

Tata Motors

Johnson Controls

Ford

Daimler

BMW

2.0

Employee satisfaction

Source: Glassdoor.com, CareerBliss, Indeed. In light blue are companies for which there are less than 100 reviews

Table 2: Company ratings – details and number of reviews Normalized weighted average scores

Total # of reviews

Glassdoor employee rating

Glassdoor # of reviews

Indeed rating

Indeed # of reviews

CareerBliss rating

CareerBliss # of reviews

BMW

3.0

296

3.6

3.5

153

Daimler

3.3

3.8

n/a

3.5

Ford

3.1

2213

3.5

490

4.4

328

3.7

1395

3.0

1671

3.2

483

250

3.7

938

Johnson Controls

2.9

1121

3.3

255

396

3.6

470

Tata Motors

3.4

206

3.7

167

n/a

3.9

Sector average

3.1

3.5

4.1

3.6

Average – all sectors

3.0

3.3

4.0

3.7

Standard deviation – all sectors

0.3

0.2

Companies

Source: CareerBliss, Glassdoor, Indeed, UBS

UBS 34

Q-Series®: Human Capital 19 August 2013

Banks and insurance Human capital materiality scorecard Labour relations, working conditions

Availability of skilled labour

Importance of innovation

•

Customer focus (services)

•

Source: UBS Global ESG Analyser survey

Companies to watch Goldman Sachs – Neutral, PT US$165 – analyst: Brennan Hawken, CPA Goldman Sachs has developed a very strong culture of success in an extremely competitive industry. Given that people in this industry tend to be highly competitive, working for a firm that is performing better than most peers can create a virtuous cycle, both reinforcing employees’ competitive spirits and endorsing a positive perception of the firm. Separately, Goldman has supported a culture of risk management that permeates the organization. This has allowed Goldman to avoid large losses that have tripped up competitors during periods of volatility and crisis. This successful execution also reinforces a positive perception of the firm by its employees, and underlines the principals of success Goldman is built upon. RBS Group – Buy, PT 365p – analyst: John-Paul Crutchley We believe the nationalization of RBS weighs on the morale of its employees, but, in spite of this, the overall satisfaction level is similar to Barclays. Several recent employee reviews reflect a motivation to deliver change. In the context of RBS being further down the road of transformation by late 2014, we consider employee morale to be an interesting indicator to watch. We see the relatively optimistic tone of employee comments as an encouraging sign of the company’s resilience, although we think this would have to be confirmed by further data, especially in the context of an upcoming change of leadership. AIG – Neutral, PT US$48 – analyst: Brian Meredith Morale has been an issue at AIG coming out of the financial crisis. Additionally, new management is trying to change the culture of the P&C insurance business to be more centralized rather than autonomous. This change is likely to hurt employee morale and we have seen a lot of departures at AIG over the past several years. Morale and the ability of employees to accept the new centralized culture, we believe, is a risk to the story, and morale indicators should be helpful indicators to watch.

UBS 35

Q-Series®: Human Capital 19 August 2013

Table 1: Companies that stand out in terms of employee satisfaction Company

What employees are saying

Employee satisfaction score

Trend 2011-12

# of reviews

Pros

Cons

Goldman Sachs

3.5

n/a

1233

Brand name, compensation, entrepreneurial and success-driven culture, smart colleagues

Environment too competitive for some, high pressure, job security

AIG

2.7

Improving

1081

Benefits, working environment, opportunities to learn

Bureaucracy, restructuring, complex organization, impact of government bailout

RBS

2.8

n/a

360

Opportunity to deliver change, emphasis on teamwork

Nationalisation, changing environment, colleagues leaving

Source: CareerBliss, Indeed, Glassdoor, UBS

Chart 1: Employee satisfaction scores in the banks and insurance sectors

Employee satisfaction

Travelers Companies

MetLife

AIG

Wells Fargo

Standard Chartered

RBS

RBC Financial Group

JP Morgan Chase

HSBC

Goldman Sachs

Deutsche bank

Citigroup

Barclays

Bank of America

3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2 2.0

Sector average

Source Glassdoor, CareerBliss, Indeed. In light blue are companies for which there are less than 100 reviews

UBS 36

Q-Series®: Human Capital 19 August 2013

Table 2: Company ratings – details and number of reviews Normalized weighted average scores

Total # of reviews

Glassdoor employee rating

Glassdoor # of reviews

Indeed rating

Indeed # of reviews

CareerBliss rating

CareerBliss # of reviews

Bank of America

3.0

8507

3.2

2708

4.0

2580

3.7

3219

Barclays

2.9

267

3.1

133

3.9

134

n/a

Citigroup

3.0

2857

3.0

1026

4.0

652

3.8

1179

Deutsche Bank

3.1

1214

3.4

724

4.0

149

3.8

341

Goldman Sachs

3.5

1233

3.8

1032

4.0

106

HSBC

3.0

1597

3.2

561

4.0

611

3.8

425

JP Morgan Chase

3.1

6519

3.3

3143

4.0

1687

3.8

1689

RBC Financial Group

3.3

196

3.6

196

n/a

RBS

2.8

360

3.1

309

4.1

3.5

Standard Chartered

3.2

256

3.5

256

n/a

Wells Fargo

2.9

5744

3.1

2782

3.9

1985

3.8

977

AIG

2.7

1081

2.9

242

3.9

106

3.5

733

MetLife

2.9

1105

3.1

500

4.0

260

3.7

345

Travelers Companies

3.0

440

3.3

366

n/a

3.8

Sector average

3.0

3.3

4.0

3.7

Average – all sectors

3.0

3.3

4.0

3.7

Standard deviation – all sectors

0.3

0.2

Companies

Source: CareerBliss, Glassdoor, Indeed, UBS

Chart 2: Evolution of Glassdoor company ratings for selected companies 3.3 3.2 3.1 3.0

Average (2008-12)

2.9

2011

2.8

2012

2.7 2.6 2.5

American International Group

Citigroup

Source: Glassdoor

UBS 37

Q-Series®: Human Capital 19 August 2013

Biotechnology Human capital materiality scorecard Labour relations, working conditions

Availability of skilled labour

Importance of innovation

Customer focus (services)

• Source: UBS Global ESG Analyser survey

Companies to watch UBS analyst: Matthew Roden Overall, we see employee satisfaction as not very well correlated to company performance in the biotech sector, and in our view not a meaningful metric on which to base investment decisions. Given that company culture, development priorities, stock price performance, and disease focus can influence employee satisfaction, because of intra-sector variability on these factors, as well as limited data on companies lower in the cap range (whose stock price performance tends to correlate more with research, rather than financial performance), we do not view employee satisfaction as meaningful for investors. Specifically, with Biogen (high) and Gilead (low) scoring at opposite ends of the satisfaction spectrum, the fact that both companies have (1) successfully managed transitional periods and new product cycle creation, (2) differentiated their revenue mix, and (3) delivered well-above market returns for investors suggests to us that satisfaction has limited relevance, and does not signal potential problems with profitability in the long run. We highlight several additional data points to keep in mind: Q

Biotech is more R&D driven and a higher proportion of its employees are in R&D relative to other drug companies (pharma).

Employee satisfaction tends to counter-correlate with margins and EBITDA/employee.

Profitability in the sector is driven by successful product development, which is very company specific.

With employee stock options a larger part of total compensation versus more mature sectors, stock price performance may have an outsized impact on employee satisfaction.

Historically, biotechs have been viewed as very favourable places to work, with Genentech (now part of Roche) consistently ranked in the top five places to work in the US.

UBS 38

Q-Series®: Human Capital 19 August 2013

Table 1: Companies that stand out in terms of employee satisfaction Employee

Company

satisfaction score

What employees are saying Trend 2011-12

# of reviews

Pros

Cons

Biogen Idec

3.5

Negative

183

Good science and research, meaningful job, compensation and benefits, good employee stock purchase plan

Some comments on the workload being too high

Gilead Sciences

2.7

n/a

105

Good products, successful and stable company, good benefits

Some comments on high workload and the company being understaffed, as well as a lack of employee recognition

Source: CareerBliss, Indeed, Glassdoor, UBS

Chart 1: Employee satisfaction scores in the biotechnology sector Employee satisfaction 3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2

Vertex Pharmaceuticals

Shire Pharmaceuticals

Regeneron

Gilead Sciences

Celgene

Biogen Idec

Amgen

2.0

Source: Glassdoor, CareerBliss, Indeed. In light blue are companies for which there are less than 100 reviews

UBS 39

Q-Series®: Human Capital 19 August 2013

Table 2: Company ratings – details and number of reviews

Companies

Normalized weighted average scores

Total # of reviews

Glassdoor employee rating

Glassdoor # of reviews

Indeed rating

Indeed # of reviews

CareerBliss rating

CareerBliss # of reviews

Amgen Inc

3.3

804

3.4

314

4.1

4.0

442

Biogen Idec Inc

3.5

183

3.8

108

4.2

4.0

Celgene Corporation

2.9

3.5

n/a

3.5

Gilead Sciences

2.7

105

2.9

n/a

3.5

Regeneron

3.3

3.6

3.8

Shire Pharmaceuticals Group

3.0

111

3.4

3.5

3.9

Vertex Pharmaceuticals

3.0

3.1

4.1

Sector average

3.1

3.4

4.0

3.9

Average – all sectors

3.0

3.3

4.0

3.7

Standard deviation – all sectors

0.3

0.2

Source: CareerBliss, Glassdoor, Indeed, UBS

UBS 40

Q-Series®: Human Capital 19 August 2013

Chemicals Human capital materiality scorecard Labour relations, working conditions

Availability of skilled labour

•

Importance of innovation

Customer focus (services)

•

Source: UBS Global ESG Analyser survey

Companies to watch Chemicals companies with high R&D activity or market-leading technologies appear to fare well in terms of employee satisfaction metrics, comments UBS analyst Joe Dewhurst. Working at a company that is seen as a global leader or a centre of excellence in specific technologies makes employees feel more secure in their jobs, and there is a tangible activity they see as responsible for driving growth. High levels of R&D activity provide an environment that is both challenging and changing. Hence, we do not find the above-average employee satisfaction at Monsanto, Syngenta and Novozymes as surprising. Novozymes, in particular, is the global leader in enzyme technology and acknowledged to employee the top enzyme scientists globally. Although the sample size is small, the high rank of Novozymes in such surveys is not a surprise, in our view, given its market leading position, collegiate culture and the high potential of enzymes to act as chemical replacements in a wide range of technologies. Monsanto – Neutral, PT US$110 – analyst: Bill Carroll Monsanto is considered the undisputed leader in agricultural biotechnology, with its technology used on the overwhelming majority of major row crops in North and South America. By all accounts, the company has fostered a culture of innovation, and maintains a strong focus on R&D. About a quarter of the workforce is employed in an R&D function, and R&D spending has been high and steady at 10-11% of revenues over each of the past five years. Continued training and development are also hallmarks of the corporate ethos. Given these institutional traits and the company’s strong stock performance over the past decade or so, it is no wonder that employee satisfaction for Monsanto is above average. However, as success inevitably breeds heightened competition, some of its peers (notably DuPont’s Pioneer division) have aggressively increased their R&D spending and been making market share inroads. Additionally, as Monsanto’s revenues have grown, so too has its complexity. As many of its products become more “commoditized”, we believe the company will need to find additional ways to continue winning in the market.

UBS 41

Q-Series®: Human Capital 19 August 2013

Table 1: Companies that stand out in terms of employee satisfaction Company

Employee satisfaction score

What employees are saying Trend 2011-12

# of reviews

Pros

Cons

Monsanto

3.3

368

At the cutting edge of science, creativity and innovation are encouraged, focus on employee safety, pay and benefits

Matrix organization can make things complex at times

LyondellBasell

2.4

n/a

137

Compensation and benefits, focus on safety

Recent loss of experienced employees according to some; lack of opportunities

Source: CareerBliss, Indeed, Glassdoor, UBS

Chart 1: Employee satisfaction scores in the chemicals sector 3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2

Employee satisfaction

Syngenta

PPG

Novozymes

Mosaic

Monsanto

LyondellBasell

Linde

Johnson Matthey

Du Pont

DOW

Bayer

BASF

Akzo Nobel

2.0

Sector average

Source: Glassdoor, CareerBliss, Indeed. In light blue are companies for which there are less than 100 reviews

UBS 42

Q-Series®: Human Capital 19 August 2013

Table 2: Company ratings – details and number of reviews

Companies

Normalized weighted average scores

Total # of reviews

Glassdoor employee rating

Glassdoor # of reviews

Indeed rating

Indeed # of reviews

CareerBliss rating

CareerBliss # of reviews

Akzo Nobel

3.1

182

3.3

4.5

3.7

100

BASF

3.0

363

3.3

3.8

257

Bayer

3.1

246

3.3

134

3.9

DOW

3.2

437

3.4

220

3.9

125

DuPont

3.2

392

3.4

149

3.9

181

Johnson Matthey

2.7

3.1

3.8

3.3

Linde

2.8

3.3

4.1

3.4

LyondellBasell

2.4

137

2.2

3.6

Monsanto

3.3

368

3.7

185

3.9

115

Mosaic

2.8

126

3.3

3.6

n/a

Novozymes

3.4

3.8

3.9

3.7

PPG

2.8

158

3.2

3.5

Syngenta

3.2

3.5

4.1

Sector average

3.0

3.3

4.0

3.7

Average – all sectors

3.0

3.3

4.0

3.7

Standard deviation – all sectors

0.3

0.2

Source: CareerBliss, Glassdoor, Indeed, UBS

UBS 43

Q-Series®: Human Capital 19 August 2013

Consumer durables & apparels Human capital materiality scorecard Labour relations, working conditions

Availability of skilled labour

Importance of innovation

Customer focus (services)

• Source: UBS Global ESG Analyser survey

Companies to watch UBS analyst Michael Binetti comments that while the high employee satisfaction at Nike is an interesting data point, it is difficult to measure how important this result is from an investor standpoint. In fact, 85% of Nike’s sale are wholesale and not retail, so the impact of staff on customers is less visible and direct than at a department store, for example. In a previous note, Michael noted that Nike had a “deep commitment to innovation and investing in brand assets […] and seeks out and reward top industry talent” (see Initiating on US department stores, April 2012). We note that the online survey results for Luxottica are skewed towards the US retail operations, and, therefore, may not be representative of the overall workforce. In 2012, retail represented around 65% of the workforce, and North American employees around 58% of the total headcount. In 2012, Luxottica performed its first global employee engagement survey, and reported an internal engagement index level of 75%. Table 1: Companies that stand out in terms of employee satisfaction Company

Employee satisfaction score

What employees are saying Trend 2011-12

# of reviews

Pros

Cons

Nike Inc.

3.3

Positive

677

Fun working culture, great products, creativity encouraged and rewarded, benefits

Long hours, competitive environment for some

Coach Inc.

3.4

Negative

234

Great brand, benefits, focus on employee and their development, realistic sales goals, loyal customers

Commissions based on store profitability

Luxottica

2.5

Positive

189

Good products, customer service, commissions

Commissions based on store profitability rather than individual sales, lack of career opportunities for some

Source: CareerBliss, Indeed, Glassdoor, UBS

UBS 44

Q-Series®: Human Capital 19 August 2013

Chart 1: Employee satisfaction scores in the consumer durables & apparels sector Employee satisfaction 3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2

Under Armour

Ralph Lauren

Nike

Luxottica

Lululemon Athletica

Coach

Adidas

2.0

Source: Glassdoor, CareerBliss, Indeed. In light blue are companies for which there are less than 100 reviews

Table 2: Company ratings – details and number of reviews

Companies

Normalized weighted average scores

Total # of reviews

Glassdoor employee rating

Glassdoor # of reviews

Indeed rating

Indeed # of reviews

CareerBliss rating

CareerBliss # of reviews

Adidas AG

3.1

295

3.5

109

4.0

116

3.7

Coach Inc.

3.4

234

3.6

197

4.4

n/a

Lululemon Athletica

2.9

3.2

n/a

Luxottica

2.5

189

2.8

111

3.3

3.5

Nike Inc.

3.3

677

3.7

354

4.0

211

4.1

112

Ralph Lauren

3.0

349

3.1

155

4.0

105

3.8

Under Armour, Inc.

3.0

3.2

4.0

n/a

Sector average

3.0

3.3

4.0

3.8

Average – all sectors

3.0

3.3

4.0

3.7

Standard deviation – all sectors

0.3

0.2

n/a

Source: CareerBliss, Glassdoor, Indeed, UBS

UBS 45

Q-Series®: Human Capital 19 August 2013

Chart 2: Evolution of Glassdoor company ratings for selected companies 4.1 3.9 3.7 3.5

Average (2008-12)

3.3

2011

3.1

2012

2.9 2.7 2.5

Nike

Coach

Luxottica

Ralph Lauren

Source: Glassdoor

UBS 46

Q-Series®: Human Capital 19 August 2013

Consumer staples Human capital materiality scorecard Labour relations, working conditions

Availability of skilled labour

•

Importance of innovation

Customer focus (services)

•

Source: UBS Global ESG Analyser survey

Companies to watch ABI – Buy, PT €80 – analysts: Melissa Earlam, Olivier Nicolai We view ABI’s culture as highly meritocratic and a key competitive advantage, but believe this is not captured by online employee satisfaction scores. ABI fosters a culture of ownership, in our view, which attracts and rewards a very specific type of employee, who buys fully into the business as a “stakeholder” and gets compensated quite materially with stock. Given its meritocratic culture, history of acquisition and lean structure, we are not surprised that ABI scores relatively low in those online surveys that can (in our view) be biased towards disgruntled employees and where the survey data has a US bias (as discussed on page 27), given InBev’s acquisition of Anheuser-Busch in 2008 and subsequent integration. ABI’s internal survey shows relatively high employee engagement (77.4% in 2012, 76% in 2011 and 2010), which suggests online survey results may, in fact, be skewed towards the opinion of unhappy employees. ABI states that online survey results contradict its own internal engagement metrics. According to the company, its workforce is united behind ABI’s Dream, People, Culture platform and is its most sustainable competitive advantage. The fact that ABI has been highly acquisitive over the past 15 years means that the integration of businesses inevitably leads to headcount cuts, which likely heavily influence employee perception. Also, ABI’s lean structure is often listed as one of the “cons” by employees. This is, in our view, quite consistent with the company’s track record of achieving cost savings, based on practices such as zero-based budgeting, which means all expenses must be justified each year – not only the increases. This type of cost-saving initiative could generate dissatisfaction among some of the workforce. Reckitt Benckiser – Buy, PT 5,210p – analyst: Eva Quiroga Reckitt Benckiser’s culture is highly meritocratic, in our view. Looking at online employee feedback, Reckitt Benckiser’s culture seems to emphasize a focus on targets and results, relatively swift decision-making, and a willingness to take chances on new products. According to CEO Rakesh Kapoor, RB’s culture is a source of competitive advantage: “Our company is very entrepreneurial. It has this edginess where it is able to take risks. Of course, these are considered risks that allow you to win big and fail small.”

UBS 47

Q-Series®: Human Capital 19 August 2013

Probably because of the meritocratic aspect of RB’s culture, the company is sometimes referred to as having a “marmite” culture20. CEO Kapoor comments that “the marmite culture actually points to the uniqueness of RB. We are not ashamed of the culture; we are proud of it. I think every company must find its own unique culture to succeed.”21 Some employees will be attracted to and be highly motivated by a meritocratic environment. But, such less consensual cultures will also likely generate some degree of dissatisfaction in some parts of the workforce. Indeed, we find that the dispersion of employee opinions is higher for Reckitt Benckiser, which is not captured by measures of average employee satisfaction. What’s more, we believe that the online employee survey results that we used can be biased towards the opinions of disgruntled employees. How does this affect employee turnover? The company points out that its “regretted churn” is low. As a sign of this, the total turnover of the top 400 executives is relatively low at 8%, according to Reckitt Benckiser’s annual report, and the “regretted churn” for the top 400 is likely to be lower than that figure. Table 1: Companies that stand out in terms of employee satisfaction Company

Employee satisfaction score

What employees are saying Trend 2011-12

# of reviews

Pros

Cons

Work/life balance, high turnover

High workload, focus on cost control

Reckitt Benckiser

2.7

Stable

243

Fast-paced environment, many opportunities to grow, company willing to take chances on new products, focused on exceeding targets

ABI

2.8

n/a

319

Great brands, good performance-driven remuneration, opportunities for career growth

Source: CareerBliss, Indeed, Glassdoor, UBS

http://www.ft.com/intl/cms/s/0/0dc91f26-c842-11dc-94a6-0000779fd2ac.html#axzz2RHP3R98O

http://businesstoday.intoday.in/story/reckitt-benckiser-global-ceo-rakesh-kapoor-interview/1/191047.html UBS 48

Q-Series®: Human Capital 19 August 2013

Chart 1: Employee satisfaction scores in the consumer staples sector

Employee satisfaction

Unilever

Reckitt Benckiser

Procter & Gamble

Philip Morris

Pepsico

Nestle

l'Oreal

Kraft Foods

Diageo

Colgate-Palmolive

Coca-Cola Company

bat uk

Altria Group

Anheuser-Busch InBev

3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2 2.0

Sector average

Source: Glassdoor, CareerBliss, Indeed. In light blue are companies for which there are less than 100 reviews

Table 2: Company ratings – details and number of reviews

Companies

Normalized weighted average scores

Total # of reviews

Glassdoor employee rating

Glassdoor # of reviews

Indeed rating

Indeed # of reviews

CareerBliss rating

CareerBliss # of reviews

Altria Group

3.0

195

3.3

165

n/a

3.7

Anheuser-Busch InBev

2.8

319

2.9

177

3.7

BAT UK

3.4

3.7

n/a

Coca-Cola Company

2.9

846

3.4

196

3.7

393

3.9

257

Colgate-Palmolive

3.5

323

3.8

144

4.5

3.9

Diageo

3.2

100

3.5

n/a

Kraft Foods

3.1

920

3.4

399

290

3.8

231

L'Oreal

3.0

253

3.2

122

3.7

Nestle

3.2

543

3.6

151

286

3.8

106

PepsiCo

3.0

856

3.3

375

3.7

441

Philip Morris

3.3

212

3.5

4.4

3.9

105

Procter & Gamble

3.5

1501

3.9

1079

251

171

Reckitt Benckiser

2.7

243

2.9

159

3.4

Unilever

3.3

664

3.6

280

4.2

279

3.9

105

Sector average

3.1

3.4

4.1

3.8

Average – all sectors

3.0

3.3

4.0

3.7

Standard deviation – all sectors

0.3

0.2

Source: CareerBliss, Glassdoor, Indeed, UBS

UBS 49

Q-Series®: Human Capital 19 August 2013

Chart 2: Evolution of Glassdoor company ratings for selected companies 4.1 3.9 3.7 3.5

Average (2008-12)

3.3

2011

3.1

2012

2.9 2.7 2.5

Procter &

Colgate-

Reckitt

Gamble

Palmolive

Benkiser

L'Oreal

Source: Glassdoor

UBS 50

Q-Series®: Human Capital 19 August 2013

Healthcare services Human capital materiality scorecard Labour relations, working conditions

Availability of skilled labour

Importance of innovation

Customer focus (services)

•

Source: UBS Global ESG Analyser survey

Companies to watch Table 1: Companies that stand out in terms of employee satisfaction Employee

Company

satisfaction score

What employees are saying Trend 2011-12

# of reviews

Pros

Cons

Express Scripts

2.3

Negative

441

Good benefits according to some

Lack of work/life balance, some complain about the focus on the bottom line

Laboratory Corporation

2.4

Negative

123

Job flexibility, good benefits

Some complaints on lack of training, and pressure to meet numbers

Source: CareerBliss, Indeed, Glassdoor, UBS

Chart 1: Employee satisfaction scores in the healthcare services sector 3.20 3.00 2.80 2.60 2.40 2.20

Employee satisfaction

Quest Diagnostics

McKesson

Laboratory Corporation

Henry Schein

HCA

Express Scripts

CVS Caremark

Cerner

Cardinal Health

AmerisourceBergen

2.00

Sector average

Source: Glassdoor, CareerBliss, Indeed. In light blue are companies for which there are less than 100 reviews

UBS 51

Q-Series®: Human Capital 19 August 2013

Table 2: Company ratings – details and number of reviews Normalized weighted average scores

Total # of reviews

Glassdoor employee rating

Glassdoor # of reviews

Indeed rating

AmerisourceBergen Corp.

2.8

190

2.8

n/a

Cardinal Health

2.8

927

3.1

217

3.8

Cerner Corp.

2.8

431

3.1

309

CVS Caremark Corporation

2.6

2910

2.8

Express Scripts Inc.

2.3

291

HCA Holdings

2.7

Henry Schein Inc.

CareerBliss rating

CareerBliss # of reviews

3.7

125

223

3.6

487

3.4

100

1179

3.7

1573

3.4

158

2.3

201

3.5

3.6

354

3.1

123

3.6

139

3.7

3.0

3.1

n/a

3.8

Laboratory Corporation of America

2.4

123

2.6

123

n/a

McKesson Corporation

2.7

668

2.9

234

3.7

250

3.6

184

Quest Diagnostics

2.8

739

2.9

194

3.9

325

3.5

220

Sector average

2.7

2.9

3.7

3.6

Average – all sectors

3.0

3.3

4.0

3.7

Standard deviation – all sectors

0.3

0.2

Companies

Indeed # of reviews

Source: CareerBliss, Glassdoor, Indeed, UBS

Chart 2: Evolution of Glassdoor company ratings for selected companies 3.4 3.2 3.0

Average (2008-12)

2.8

2011

2.6

2012

2.4 2.2 2.0

Cerner

Cardinal Health

HCA

Express

Laboratory

Scripts

Corp.

Source: Glassdoor

UBS 52

Q-Series®: Human Capital 19 August 2013

Industrials Human capital materiality scorecard Labour relations, working conditions

Availability of skilled labour

Importance of innovation

•

Customer focus (services)

•

Source: UBS Global ESG Analyser survey

Companies to watch 3M – Buy, PT US$128– analyst: Jason Feldman 3M’s culture of innovation is considered critical to its success and an important component of our Buy rating on the stock. It is encouraging that employee satisfaction overall is high given the importance of retaining staff in key science/engineering functions, and because we believe that true innovation is more likely in a positive workplace environment. For an organization the size of 3M, it is not surprising that there are some complaints about bureaucracy. Regarding concerns about a lack of marketing capabilities, we believe this is a major focus of 3M’s relatively new CEO. General Electric – Buy, PT US$27 – analyst: Jason Feldman GE’s positive employee satisfaction score is a pleasant surprise to us given the substantial changes at the company (particularly at Finance) over the last few years. Employee retention is important for GE, particularly in sales and engineering-related roles. Historically, GE has attracted some of the “best and brightest”, and it appears that trend continues. Given its sheer size and complexity, complaints about bureaucracy and slow decision-making are to be expected. This view is shared by many investors who believe that the structure and size of the company make it inherently less nimble. Danaher – Buy, PT US$77 – analyst: Jason Feldman Given Danaher’s business model, we believe the low employee satisfaction score is to be expected. Simply, the Danaher culture is not for everyone. The high pressure and process orientation at Danaher can be difficult for some employees to accept. Further, given the rapid pace of acquisitions at Danaher, there are always large numbers of employees who are fairly new to the culture, and some do not last. This is partly exacerbated by Danaher’s M&A focus, which often (although not always) targets underperforming companies that have not focused heavily on cost control, efficiency or process. We believe that employees who adapt and last at Danaher are among the most talented in the industrial space, and would expect a very different employee satisfaction score if employees recently added via M&A were excluded (or if the focus was on employees who had been with Danaher for a period of time). The low employee satisfaction score in no way undermines our positive view of the company, its strategy, or its future prospects. The Danaher Business System (DBS) is a business management system, or a set of tools and processes, that is “designed to continuously improve business performance in critical areas of quality, delivery, cost and innovation”. DBS is UBS 53

Q-Series®: Human Capital 19 August 2013

used both to assist with integration of newly acquired businesses, and then to achieve ongoing improvements in operational performance. The DBS is based on the Toyota Production System, which was developed by Toyota in the early 1950s. The Jacobs Production System was implemented by Jacobs Vehicle Systems (a Danaher subsidiary) in the late 1980s, and then adopted more widely by Danaher as the DBS around 1990. Many (if not most) manufacturing companies today discuss their own version of a business system based on lean manufacturing or six sigma concepts. However, we believe that Danaher implemented its system earlier than most, that it has been extremely consistent and effective in its application of DBS, and that the concept of continuous improvement is more ingrained in the culture at Danaher than at other industrial firms. While it is difficult to quantify the benefits of DBS explicitly, we believe that Danaher’s strict adherence to DBS is one of the main reasons why it has managed to successfully integrate the large number of acquisitions it has completed over the last few decades, and more recently it has been responsible for success in improving underlying organic growth rates and new product development. Thermo Fisher – Buy, PT US$101 – analyst: Daniel Arias We are surprised by the relatively low employee satisfaction for Thermo Fisher. Thermo Fisher is an industry leader in many areas, and we have found its strategic vision to be intact and clear, based on conversations with management. We believe Thermo Fisher’s acquisition strategy and focus on productivity gains may be skewing employee satisfaction downwards, as this tends to generate disappointment in some parts of the workforce (or indeed among ex-employees). The low employee satisfaction score does not change our overall investment thesis. Table 1: Companies that stand out in terms of employee satisfaction Company

Employee satisfaction score

What employees are saying Trend 2011-12

# of reviews

Pros

Cons

3.3

n/a

729

Innovative and collaborative environment, opportunities to move within the company

Bureaucratic, focus on sales, but some point out a lack of marketing capabilities

3.2

Stable

2344

Talented workforce, great learning opportunities and good mobility

Very bureaucratic, slow decisionmaking processes

ABB

3.2

n/a

448

Good technology and strong on engineering, respected brand, work/life balance

Bureaucratic at times

Danaher Corporation

2.4

n/a

145

High pressure, process driven, focus on results

High pressure, lean management, too much focus on stockholder returns for some

Thermo Fisher

2.5

Negative

448

Good products and technology, good benefits

Lack of employee engagement for some, high workload for some

Source: CareerBliss, Indeed, Glassdoor, UBS

UBS 54

Q-Series®: Human Capital 19 August 2013

Chart 1: Employee satisfaction scores in the industrials sector 3.4 3.2 3.0 2.8 2.6 2.4 2.2 Volvo B

Thermo Fisher

Siemens

Schneider Electric

Honeywell International

General Electric

Emerson Electric

Deere & Co.

Sector average

Illinois Tool Works

Employee satisfaction

Danaher

Caterpillar

Atlas Copco

Agilent

ABB

3M Company

2.0

Source: Glassdoor, CareerBliss, Indeed. In light blue are companies for which there are less than 100 reviews

Table 2: Company ratings – details and number of reviews Normalized weighted average scores

Total # of reviews

Glassdoor employee rating

Glassdoor # of reviews

Indeed rating

Indeed # of reviews

CareerBliss rating

CareerBliss # of reviews

3M Company

3.3

729

3.3

255

4.1

112

4.0

362

ABB Ltd

3.2

448

3.6

113

3.8

335

Agilent

3.1

992

3.6

316

4.1

3.7

621

Atlas Copco A

3.1

132

3.6

4.0

3.6

Caterpillar Inc.

3.1

1170

3.5

372

3.9

311

3.8

487

Danaher Corporation

2.4

145

2.3

3.5

Deere & Co.

3.1

374

3.5

193

3.7

123

Emerson Electric Co.

3.0

187

3.4

3.7

115

General Electric

3.2

2344

3.6

1015

4.0

206

3.8

1123

Honeywell International Inc.

3.0

1433

3.3

261

4.0

371

3.7

801

Illinois Tool Works

3.0

108

3.3

3.7

Schneider Electric

3.1

507

3.4

284

4.0

109

3.7

114

Siemens

3.1

1415

3.6

245

4.0

344

3.7

826

Thermo Fisher

2.5

448

2.7

214

3.6

3.5

144

Volvo B

3.1

175

3.6

4.0

3.7

Sector average

3.0

3.4

4.0

3.7

Average – all sectors

3.0

3.3

4.0

3.7

Standard deviation – all sectors

0.3

0.2

Companies

4.0

Source: CareerBliss, Glassdoor, Indeed, UBS

UBS 55

Q-Series®: Human Capital 19 August 2013

Chart 2: Evolution of Glassdoor company ratings for selected companies 4.5 4.0

Average (2008-12)

3.5

2011 3.0

2012

2.5 2.0

General Electric

Siemens

Thermo-Fisher

Source: Glassdoor

UBS 56

Q-Series®: Human Capital 19 August 2013

Medical technology Human capital materiality scorecard Labour relations, working conditions

Availability of skilled labour

Importance of innovation

•

Customer focus (services)

Source: UBS Global ESG Analyser survey

Chart 1: Employee satisfaction scores in the medical technology sector 3.4 3.2 3.0 2.8 2.6 2.4 2.2

Employee satisfaction

Zimmer Holdings

Stryker

St. Jude Medical

Smith & Nephew

Medtronic

Johnson & Johnson

Edwards Lifesciences

CareFusion

Boston Scientific

Baxter International

Abbott Laboratories

2.0

Sector average

Source: Glassdoor, CareerBliss, Indeed. In light blue are companies for which there are less than 100 reviews

Table 2: Company ratings – details and number of reviews Normalized weighted average scores

Total # of reviews

Glassdoor employee rating

Glassdoor # of reviews

Indeed rating

Indeed # of reviews

CareerBliss rating

CareerBliss # of reviews

Abbott Laboratories

3.2

1203

3.4

336

4.0

167

3.9

700

Baxter International Inc.

3.1

705

2.9

175

4.0

111

3.9

419

Boston Scientific Corp.

3.0

644

3.0

228

4.0

130

3.8

286

CareFusion Corporation

2.4

200

2.6

177

3.5

Edwards Lifesciences Corp

3.2

107

3.3

3.9

Johnson & Johnson

3.3

1389

3.5

812

4.0

138

4.0

439

Medtronic, Inc.

3.1

589

3.4

262

4.0

112

3.8

215

Smith & Nephew

2.9

3.0

3.9

St. Jude Medical, Inc.

2.9

243

3.1

141

3.7

102

Stryker Corporation

3.0

388

3.2

222

3.8

Zimmer Holdings, Inc.

2.5

2.7

Sector average

3.0

3.1

4.0

3.8

Average – all sectors

3.0

3.3

4.0

3.7

Standard deviation – all sectors

0.3

0.2

Companies

4.0

Source: CareerBliss, Glassdoor, Indeed, UBS UBS 57

Q-Series®: Human Capital 19 August 2013

Chart 2: Evolution of Glassdoor company ratings for selected companies 3.8 3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2 2.0

Average (2008-12) 2011 2012

Johnson &

Abbott

Johnson

Laboratories

Medtronics

CareFusion Corporation

Source: Glassdoor

UBS 58

Q-Series®: Human Capital 19 August 2013

Mining Human capital materiality scorecard Labour relations, working conditions

Availability of skilled labour

•

Importance of innovation

Customer focus (services)

Source: UBS Global ESG Analyser survey

Companies to watch Rio Tinto Plc – Buy, PT 3,650p – analysts: Myles Allsop, Glyn Lawco*ck Online employee surveys suggest Rio Tinto is an attractive place to work in the mining sector, although we would like those results to be confirmed by further data because of the small sample size of the surveys. Employee comments also corroborate our view that Rio Tinto has a relatively strong focus on safety and communities. In October 2012, we selected Rio Tinto as one of our top picks among miners from an ESG standpoint, emphasizing the culture of openness and access to management, which is reflected, for example, in its top position in the 2013 Extel survey in the metals and mining sector. We expect this culture to be maintained by Sam Walsh, Rio’s new CEO, but we intend monitoring the employee survey results next year in an environment where Rio Tinto is cutting costs significantly. Table 1: Companies that stand out in terms of employee satisfaction Company

Employee satisfaction score

Rio Tinto

3.4

What employees are saying Trend 2011-12

# of reviews

n/a

Pros

Cons

Great benefits and training, strong focus on safety and communities, multicultural environment

Process heavy and conservative at times

Source: CareerBliss, Indeed, Glassdoor, UBS

Chart 1: Employee satisfaction scores in the mining sector Employee satisfaction score 3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2 2.0 Alcoa

BHP Billiton

Rio Tinto

Source: Glassdoor, CareerBliss, Indeed. In light blue are companies for which there are less than 100 reviews

UBS 59

Q-Series®: Human Capital 19 August 2013

Table 2: Company ratings – details and number of reviews

Companies

Normalized weighted average scores

Total # of reviews

Glassdoor employee rating

Glassdoor # of reviews

Indeed rating

Indeed # of reviews

CareerBliss rating

CareerBliss # of reviews

Alcoa Inc.

2.9

446

2.9

4.0

3.7

324

BHP Billiton Plc

3.0

117

3.2

4.0

3.9

Rio Tinto Limited

3.4

3.9

4.0

3.8

Sector average

3.1

3.3

4.0

Average – all sectors

3.0

3.3

4.0

3.7

Standard deviation – all sectors

0.3

0.2

Source: CareerBliss, Glassdoor, Indeed, UBS

UBS 60

Q-Series®: Human Capital 19 August 2013

Oil and gas Human capital materiality scorecard Labour relations, working conditions

Availability of skilled labour

Importance of innovation

Customer focus (services)

• Source: UBS Global ESG Analyser survey

Companies to watch Royal Dutch Shell – Neutral, PT 2,200p – analyst: Jon Rigby, CFA According to its annual report, the ‘Shell People Survey’ is one of the key tools used by the company to measure employee engagement. Shell states that the survey has a consistently high response rate and the engagement score in 2012 was 77% favourable – a three point increase from 2011. Table 1: Companies that stand out in terms of employee satisfaction What employees are saying

Employee

Company

satisfaction score

Trend 2011-12

# of reviews

Pros

Cons

Process-oriented, slow-moving, somewhat risk-averse organization

Slow decision-making and consensus culture

Chevron Corp

3.4

Negative

846

Focus on safety, diversity, career development, good benefits, compensation and work/life balance; "Chevron does not skimp when it comes to taking care of its employees"

Royal Dutch Shell

3.3

Negative

617

International opportunities, good compensation and benefits, career opportunities, and focus on safety

Source: CareerBliss, Indeed, Glassdoor, UBS

Chart 1: Employee satisfaction scores in the oil and gas sector

Employee satisfaction 3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2

Suncor Energy

Royal Dutch Shell

Occidental Petroleum

ExxonMobil

ConocoPhillips

Chevron

2.0

Source: Glassdoor, CareerBliss, Indeed. In light blue are companies for which there are less than 100 reviews

UBS 61

Q-Series®: Human Capital 19 August 2013

Table 2: Company ratings – details and number of reviews Normalized weighted average scores

Total # of reviews

Glassdoor employee rating

Glassdoor # of reviews

Indeed rating

Indeed # of reviews

CareerBliss rating

CareerBliss # of reviews

3.1

873

3.5

415

4.0

169

3.7

289

Chevron Corp

3.4

846

3.8

327

4.0

164

4.0

355

ConocoPhillips

3.1

335

3.4

193

4.0

3.7

128

ExxonMobil Corp

3.2

669

3.4

194

4.0

171

3.9

304

Occidental Petroleum Corp

3.1

3.2

3.9

Royal Dutch Shell

3.3

617

3.8

180

3.9

281

Suncor Energy Inc

3.0

3.3

Sector average

3.2

3.5

4.0

3.9

Average – all sectors

3.0

3.3

4.0

3.7

Standard deviation – all sectors

0.3

0.2

Companies

4.0

156

Source: CareerBliss, Glassdoor, Indeed, UBS

Chart 2: Evolution of Glassdoor company ratings for selected companies 4.3 3.8

Average (2008-12)

3.3

2011 2.8

2012

2.3 1.8

Chevron Corp

Royal Dutch Shell

Source: Glassdoor

UBS 62

Q-Series®: Human Capital 19 August 2013

Oil services Human capital materiality scorecard Labour relations, working conditions

Availability of skilled labour

Importance of innovation

Customer focus (services)

• Source: UBS Global ESG Analyser survey

Companies to watch Human capital is a relevant issue in the oil services sector, according to Angie Sedita, UBS US oil services and drilling sector analyst. Companies which value it are more likely to be higher-quality companies with more innovation, and tend to dominate their sector in the long term, in her view. Schlumberger and FMC Technologies are two examples of such companies with strong corporate culture, in her view. . Table 1: Companies that stand out in terms of employee satisfaction Company

Employee satisfaction score

What employees are saying Trend 2011-12

# of reviews

Pros

Cons Heavy workload and very little work/life balance

Schlumberger

3.1

Negative

1226

Leading technology and great technical training, multicultural environment

FMC Technologies

3.2

n/a

205

Good technology and training, good work/life balance, and benefits

Source: CareerBliss, Indeed, Glassdoor, UBS

UBS 63

Q-Series®: Human Capital 19 August 2013

Chart 1: Employee satisfaction scores in the oil services sector

Employee satisfaction 3.4 3.2 3.0 2.8 2.6 2.4 2.2

Weatherford

Schlumberger

Halliburton

FMC Technologies

Baker Hughes

Aker Solutions

2.0

Source: Glassdoor, CareerBliss, Indeed. In light blue are companies for which there are less than 100 reviews

Table 2: Company ratings – details and number of reviews Normalized weighted average scores

Total # of reviews

Glassdoor employee rating

Glassdoor # of reviews

Indeed rating

Indeed # of reviews

CareerBliss rating

CareerBliss # of reviews

Aker Solutions

3.0

137

3.2

4.0

3.8

289

Baker Hughes Inc.

3.0

677

3.1

296

3.9

146

3.8

355

FMC Technologies Inc.

3.2

205

3.5

4.0

3.9

128

Halliburton Co.

3.0

588

3.3

261

4.0

210

3.6

304

Schlumberger Ltd.

3.1

1226

3.5

775

4.0

200

3.7

Weatherford International Ltd.

2.8

266

3.2

136

3.9

3.4

281

Sector average

3.0

3.3

4.0

3.7

Average – all sectors

3.0

3.3

4.0

3.7

Standard deviation – all sectors

0.3

0.2

Companies

Source: CareerBliss, Glassdoor, Indeed, UBS

UBS 64

Q-Series®: Human Capital 19 August 2013

Chart 2: Evolution of employee satisfaction levels for selected companies 3.8 3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2 2.0 1.8

Average (2008-12) 2011 2012

Schlumberger

Baker Hughes

Source: Glassdoor

UBS 65

Q-Series®: Human Capital 19 August 2013

Pharmaceuticals Human capital materiality scorecard Labour relations, working conditions

Availability of skilled labour

Importance of innovation

•

Customer focus (services)

•

Source: UBS Global ESG Analyser survey

Companies to watch Novo Nordisk – Buy, PT DKr1,040 – analyst: Andrew Whitney, PhD, CA Given Novo is a leading innovator in its field (clinical research, in particular in diabetes) and the company/stock has performed well over the last five years, we are not surprised that Novo scores highly with its employees. We believe there is a positive feedback loop between motivated scientists, innovative medicine, and positive clinical (and therefore financial) results. Based on our knowledge of the company, we see the innovation-based culture and high levels of employee motivation/satisfaction as likely to persist. Novo is controlled by the Novo Nordisk Foundation. This potentially allows for strategic decisions to be made on a longer-term basis, with some of the uncertainty for employees removed relative to any companies with shorter-term pressures. Table 1: Companies that stand out in terms of employee satisfaction Company

What employees are saying

Employee satisfaction score

Novo Nordisk

3.4

Trend 2011-12

# of reviews

n/a

121

Pros

Cons

Very employee focused, great pipeline of products, serious about social responsibility

Some worry that growth may change the company’s culture

Source: CareerBliss, Indeed, Glassdoor, UBS

Chart 1: Employee satisfaction scores in the pharmaceutical sector

Employee satisfaction

Sanofi

Roche

Pfizer

Novo

Novartis

Merck & Co

Lilly (Eli) & Co.

GSK

Bristol-Myers Squibb

Bayer

AstraZeneca

Allergan

3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2 2.0

Sector average

Source: Glassdoor, CareerBliss, Indeed. In light blue are companies for which there are less than 100 reviews

UBS 66

Q-Series®: Human Capital 19 August 2013

Table 2: Company ratings – details and number of reviews Normalized weighted average scores

Total # of reviews

Glassdoor employee rating

Glassdoor # of reviews

Indeed rating

Indeed # of reviews

CareerBliss rating

CareerBliss # of reviews

Allergan

3.0

238

3.4

4.0

3.7

144

AstraZeneca

3.1

468

3.3

204

3.8

264

Bayer

3.1

226

3.3

4.0

119

4.0

Bristol-Myers Squibb

3.2

673

3.4

208

4.1

3.9

380

GSK

3.2

594

3.4

200

4.1

175

4.0

219

Lilly (Eli) & Co.

3.1

602

3.4

293

4.0

3.8

236

Merck & Co

3.1

1005

3.2

458

4.0

174

3.9

373

Novartis

3.1

567

3.4

108

4.0

167

3.8

292

Novo

3.4

121

3.7

4.0

Pfizer

3.1

1542

3.1

626

4.0

331

4.0

585

Roche

3.2

273

3.4

4.0

3.9

149

Sanofi

3.2

346

3.4

4.0

3.9

217

Sector average

3.1

3.4

4.0

3.9

Average – all sectors

3.0

3.3

4.0

3.7

Standard deviation – all sectors

0.3

0.2

Companies

Source: CareerBliss, Glassdoor, Indeed, UBS

UBS 67

Q-Series®: Human Capital 19 August 2013

Retailers Human capital materiality scorecard Labour relations, working conditions

Availability of skilled labour

Importance of innovation

Customer focus (services)

• Source: UBS Global ESG Analyser survey

Companies to watch General retailers

Costco – Buy, PT US$124 – analyst: Jason DeRise, CFA Costco stands out with a particularly high employee satisfaction score in this survey. This result seems consistent with the former CEO and founder Jim Sinegal’s stated business philosophy: “I happen to believe that, in order to reward the shareholder in the long term, you have to please your customers and workers.” Along with the value proposition offered to Costco’s members (highquality products at a low price), high employee morale is likely to be a factor behind the high customer satisfaction (one of the highest among its peers, according to the American Customer Survey) and the very high customer loyalty (membership renewals reached an all-time high in the US of 90%, despite a recent fee increase in November 2011). In our view, its engaged workforce plays a role in reinforcing customers’ general perception of quality surrounding Costco’s products and generating the ‘treasure hunt’ atmosphere that Costco wants to create in its stores. Wal-Mart – Buy, PT US$88 – analyst: Jason DeRise, CFA Wal-Mart scores lower than the industry average in this survey, but not significantly so (less than one standard deviation), and certainly better than one would expect, given the negative press coverage surrounding some of WalMart’s alleged labour practices 22 . Some employees complain about the compensation and high workload, but this is balanced by others saying that WalMart offers good opportunities of advancement (keeping in mind that Wal-Mart employs 1.3m people in the US). What does this mean for investors? UBS analyst Jason DeRise believes that Wal-Mart can drive revenues and profits higher by increasing the number of employees per store to improve customer service23 (Wal-Mart, Now, later and long term, Jason DeRise, CFA, 15 April 2013). With increased staff levels, Wal-Mart can improve on shelf availability and increase checkout speed, which should increase customer trips. As we model it, an improvement in shelf availability would pay for the increased staff levels, with increasing traffic providing incremental upside.

See for example: http://www.nytimes.com/2012/10/05/business/walmart-workers-in-california-protest.html?_r=0

Which trails the other US supermarkets according to the American Customer Satisfaction Index UBS 68

Q-Series®: Human Capital 19 August 2013

Food retailers

According to UBS analyst Jason DeRise, the biggest challenge for a food retailer is getting the vision from the head office to be executed in the stores, because the business model typically relies on employees who are not usually paid highly to execute the plan. How do you motivate low-paid employees to be the face of the organization? Whole Foods’ employees are not only given rewards for strong performance, but also given the ability to make decisions in the store which affect business outcomes. Whole Foods leverages its decentralized structure by properly incentivizing the right behaviour, which drives up employee satisfaction. Safeway is centrally structured and therefore requires store level employees to be good executors of the plan. However, the employees have less influence on the plan for their store than a comparable worker at Whole Foods. What is the motivation for these store-level employees to care about the customer and go the extra mile, other than avoiding complaints/bad reviews? Whole Foods – Buy, PT US$60 – analyst: Jason DeRise, CFA We do not find the above-average employee satisfaction at Whole Foods surprising, and it broadly supports our view (stated in Differentiation wins, 13 August 2012) that the company continues to drive employee and customer satisfaction simultaneously, by creating a structure where store-level employees are directly incentivised to drive both revenues and profits by providing highquality service. Whole Foods stores have among the highest SG&A/sq. ft among its peers, but it is among the best in terms of revenue productivity. Safeway – Sell, PT US$20 – analyst: Jason DeRise, CFA The relatively low employee satisfaction at Safeway seems consistent with the comparatively low number of employee/sq. ft that we observed in Differentiation wins (DeRise, 13 August 2012). In our view, investing in SG&A could be one way for Safeway to drive both employee and customer satisfaction levels up, and ultimately could help the company to differentiate (please see DeRise, US Staples Retailers, Sector Keys, June 2013). Safeway, however, state that their customer satisfaction scores are strong, which the company believes shows its employees are engaged and providing excellent service to its customers.

UBS 69

Q-Series®: Human Capital 19 August 2013

Table 1: Companies that stand out in terms of employee satisfaction Company

What employees are saying

Employee satisfaction score

Trend 2011-12

# of reviews

Pros

Cons

Costco

3.3

Stable

1113

Compensation and benefits, career opportunities, low turnover, good working environment, and feeling that management cares

High expectations, work/life balance

Whole Foods Market

3.2

Positive

937

Compensation and benefits, strong values and diverse culture, culture of training for internal advancement

Some associates complain they cannot afford to shop there, customers are always right

Sainsbury J

3.1

N/a

Good working environment and opportunities

N/A

Safeway

2.6

Negative

1487

Good benefits, training, flexibility to move within departments

Some consider pay to be below average in the industry, work/life balance also an issue for some

AutoZone

2.5

Stable

1009

Job security, learning experience, flexible scheduling, compensation at higher levels

Work/life balance, some employees think they are not incentivised to perform, stores can be understaffed

Source: CareerBliss, Indeed, Glassdoor, UBS

Chart 1: Employee satisfaction scores in the retail sector 3.4 3.2 3.0 2.8 2.6 2.4 2.2

Wal-Mart Stores

Walgreen

TJX Companies

The Kroger Company

Tesco

Target

Sainsbury J

Safeway, Inc.

M&S

Lowe's

Inditex (Zara)

Sector average

Whole Foods Market, Inc.

Employee satisfaction

Home Depot

H&M

Costco

AutoZone Inc

2.0

Source: Glassdoor, CareerBliss, Indeed. In light blue are companies for which there are less than 100 reviews

UBS 70

Q-Series®: Human Capital 19 August 2013

Table 2: Company ratings – details and number of reviews Normalized weighted average scores

Total # of reviews

Glassdoor employee rating

Glassdoor # of reviews

Indeed rating

Indeed # of reviews

CareerBliss rating

CareerBliss # of reviews

AutoZone Inc

2.5

1009

2.6

260

3.8

439

3.3

310

Costco

3.3

1113

3.7

539

4.1

380

3.8

194

H&M

2.9

226

3.2

215

n/a

3.5

Home Depot

2.9

6640

3.2

1999

3.9

3323

3.5

1318

Inditex (Zara)

2.8

232

2.9

117

4.0

110

3.8

Lowe's

2.8

3851

3.2

1146

3.8

2269

3.5

436

M&S

3.2

3.5

n/a

Safeway, Inc.

2.6

1487

2.7

442

3.8

804

3.4

241

Sainsbury J

3.1

3.4

n/a

Target

2.9

7515

3.2

3488

3.9

3193

3.4

834

Tesco

2.8

123

3.1

123

n/a

The Kroger Company

2.7

1663

2.9

575

3.8

1000

3.5

TJX Companies

2.7

782

2.8

166

3.8

541

3.5

Walgreen

2.8

3827

3.0

1424

3.9

2071

3.5

332

Wal-Mart Stores

2.6

16050

2.9

3212

3.7

11747

3.3

1091

Whole Foods Market, Inc.

3.2

937

3.5

542

4.0

313

3.8

Sector average

2.9

3.1

3.9

3.5

Average – all sectors

3.0

3.3

4.0

3.7

Standard deviation – all sectors

0.5

0.3

0.2

Companies

Source: CareerBliss, Glassdoor, Indeed, UBS

Chart 2: Evolution of Glassdoor company ratings for selected companies

4.3 3.8 Average (2008-12)

3.3

2011 2.8

2012

2.3

Whole Foods Market

Walmart

TJX

Safeway

CVS Caremark

Costco

Auto Zone

1.8

Source: Glassdoor

UBS 71

Q-Series®: Human Capital 19 August 2013

Technology hardware Human capital materiality scorecard Labour relations, working conditions

Availability of skilled labour

Importance of innovation

Customer focus (services)

• Source: UBS Global ESG Analyser survey

Companies to watch Apple – Buy, PT US$500 – analyst: Steven Milunovich, CFA Apple’s culture of innovation and creativity is unusual – as well as critical to our Buy rating, as innovation is considered the primary way out of its current difficulties. Competitors catching up in technology along with the phenomenal success of the iPad make growth more difficult going forward. A big question is whether the “Apple magic” can continue without Steve Jobs. We are encouraged that employee satisfaction overall is high, as retaining and attracting top talent is important. On the negative side, Apple’s famous secrecy has some drawbacks both internally and externally. Apple’s lack of transparency with analysts, such as previously ultra-conservative guidance and no analyst meetings, was not a hindrance when the stock was outperforming, but that is no longer the case. We would like to see Apple not only sharing more of its excess cash with investors, but providing more insight into its thinking. Hewlett-Packard – Neutral, PT US$28 – analyst: Steven Milunovich, CFA It is not surprising that, following recent events and an underperforming stock, employee satisfaction at HP is at the bottom of the IT hardware group. CEO Meg Whitman is setting a new course and making positive moves, such as centralizing strategy and marketing, and investing in innovation. Headcount cuts continue, but management says it is keeping most of the people it wants to retain. FY1Q results exceeded expectations, especially in terms of strong cash flow, which removes the worst-case scenario. Still, the company’s brand has taken a hit, and HP is losing share in most businesses. This is a multi-year turnaround which we expect to hit air pockets along the way. ARM Holdings – Buy, PT 970p – analyst: Gareth Jenkins ARM has a relatively small employee base for its global importance and, together with the strong financial, operational and share price performance, we are not surprised that ARM’s employees feel satisfied with the achievements that they and their colleagues have made. Given the strength of margins, it is testament to ARM’s senior management that costs are so well controlled (e.g. travel budget) and it is interesting that despite this employees remain well satisfied.

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Q-Series®: Human Capital 19 August 2013

Ericsson – Neutral, PT SKr77 – analyst: Gareth Jenkins With tough competition, a difficult market and margins in its core business at a low in 2012, we believe it is impressive that employee satisfaction, driven by its number one market position, remains high at Ericsson. Facing ongoing competition from Chinese peers, the consensus-driven decision-making is a slight concern to us, but not something we believe is unique among large telecom equipment companies. Table 1: Companies that stand out in terms of employee satisfaction Company

What employees are saying

Employee satisfaction score

Trend 2011-12

# of reviews

Pros

Cons

Apple

3.5

Stable

2547

Brand name, great products and innovation, talented colleagues with high degree of knowledge, focus on end-user experience

Secretive even internally, lack of career path, competitive, work/life balance

Qualcomm

3.4

Slightly negative

1121

Fast paced, compensation and benefits, technologically strong and IP driven

Focus on execution can get in the way of work-life balance, competitive environment

ARM Holdings

3.2

n/a

Highly technical resources, talented and committed colleagues, relaxed and positive work environment

Focus on keeping costs low, according to some

Ericsson

3.3

n/a

1316

Collaborative work culture and work/life balance, reputation

Consensus-driven culture, which results in slow decision-making

Hewlett Packard

2.6

Negative

6162

Work/life balance and flexible hours, good place to start a career with many learning opportunities

Sense of a loss of the company’s culture following acquisitions (for some), too many strategic changes

Source: CareerBliss, Indeed, Glassdoor, UBS

Chart 1: Employee satisfaction scores in the technology hardware sector 3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2

Employee satisfaction

Texas Instruments

Qualcomm

Intel

IBM

Hewlett Packard

Ericsson

EMC Corporation

Dell

Corning

Cisco Systems

Broadcom

ARM Holdings

Applied Materials

Apple

Analog Devices

Altera Corporation

2.0

Sector average

Source: Glassdoor, CareerBliss, Indeed. In light blue are companies for which there are less than 100 reviews

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Table 2: Company ratings – details and number of reviews Normalized weighted average scores

Total # of reviews

Glassdoor employee rating

Glassdoor # of reviews

Indeed rating

Indeed # of reviews

CareerBliss rating

CareerBliss # of reviews

Altera Corporation

2.8

161

3.1

161

n/a

Analog Devices Inc

3.4

245

3.6

129

n/a

4.0

116

Apple Inc

3.5

2547

3.8

1643

4.4

340

3.9

564

Applied Materials Inc

3.0

954

3.0

332

4.0

3.8

561

ARM Holdings plc

3.2

3.5

n/a

Broadcom Corporation

3.1

494

3.3

352

n/a

3.8

142

Cisco Systems Inc

3.2

3929

3.4

2515

n/a

4.0

1414

Corning Inc

3.1

249

3.5

4.0

3.8

136

Dell

2.9

2820

3.1

1478

4.0

394

3.6

948

EMC Corporation

3.1

1512

3.4

943

4.0

3.7

473

Ericsson

3.3

1316

3.6

790

4.0

123

3.8

403

Hewlett Packard

2.6

6162

2.8

4856

4.0

782

3.6

524

IBM

2.9

9430

3.1

6362

4.0

1033

3.8

2035

Intel Corp

3.4

3199

3.7

1918

4.3

187

3.9

1094

Qualcomm Inc

3.4

1121

3.7

725

4.0

338

Texas Instruments Inc

3.3

908

3.5

577

n/a

4.0

331

Sector average

3.1

3.3

4.0

3.8

Average – all sectors

3.0

3.3

4.0

3.7

Standard deviation – all sectors

0.3

0.2

Companies

Source: CareerBliss, Glassdoor, Indeed, UBS

Chart 2: Evolution of Glassdoor company ratings for selected companies 4.3 3.8

Average (2008-12)

3.3

2011

2.8

2012

2.3 1.8

Apple Inc

Intel Corp

Qualcomm

HewlettPackard

Source: Glassdoor

UBS 74

Q-Series®: Human Capital 19 August 2013

Technology software & services Human capital materiality scorecard Labour relations, working conditions

Availability of skilled labour

Importance of innovation

•

Customer focus (services)

Source: UBS Global ESG Analyser survey

Companies to watch Intuit – Buy, PT US$69 – analyst: Brent Thill Intuit’s high employee satisfaction scores are consistent with the company’s history of being recognized as “most admired”, “most innovative”, and “best places/companies to work”. We believe a culture of innovation is important in fuelling Intuit’s goal of remaining a growth company, especially given its size (annual revenue in excess of US$4bn). Management is aware of the need for motivated employees to drive that innovation. In the past, it adopted Google’s model of allowing key employees to set aside part of their week to work on individual projects. The focus on a high-performing organization is showing results: employee engagement scores exceed 85%, the number of mobile apps increased from just one in April 2008 to more than 50 in early 2013, and Intuit has consistently delivered double-digit earnings growth. SAP – Neutral, PT €62 – analyst: Michael Briest Since 2012, senior management at SAP has been measured and rewarded on the level of “employee engagement”, which stood at 79% in 2012, up from 68% in 2010 when the current co-CEOs were appointed. There is a target of reaching 82% by 2015. Human capital is considered to be of crucial importance to SAP’s ability to innovate and compete. We believe management to be charismatic and popular, and this is reflected in the internal and external employee feedback. The recently-announced decision of co-CEO Snabe to move to the Supervisory Board next year was therefore seen as a loss and taken negatively. The 2012 acquisitions of SuccessFactors and Ariba brought in 4,000-plus employees from two cloud companies, and SAP is keen to preserve the stand-alone culture of these businesses, despite their making up a minority of the nearly 65,000 workforce. We see it as crucial that SAP is successful here, given the growing threat to SAP from cloud-based competitors. Involuntary attrition is not a problem for SAP, with a rate of just 6% in 2012 (2011: 7%), but this comes at a high cost in terms of employee and executive options, which totalled €522m in 2012 and are expected to reach €440-480m this year. Base salaries and bonuses also rose 3% last year to average €110k per employee, and employee costs made up 44.8% of sales including share-based payment expenses in 2012 (2011: 41.3%), one of the main drags on margin expansion.

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Visa – Neutral, PT US$202 – analyst: John T Williams We believe that Visa’s corporate culture is not a defining factor in the company’s performance, for several reasons. First, a major driver of the company’s strong results in recent years is secular-driven growth (i.e. the shift from cash and cheque to electronic payments) that would have materialized regardless of the strength of the company culture, given Visa’s strong brand and market position. Second, we believe the survey results make sense, as we have always viewed the culture as conservative. This is a result of Visa’s gatekeeping, partner-agnostic role in the system. Simply put, Visa’s strong share and market position mean it does not need to be an innovator. Finally, the business itself is a relatively low user of human capital - it is asset-light and not labourintensive, so revenue/profit per employee is quite high. We suspect that, over time, the employee base will not scale up much higher, and it is possible that employees recognize that and feel they may be challenged by advances in technology. Table 1: Companies that stand out in terms of employee satisfaction What employees are saying

Employee

Company

satisfaction score

Trend 2011-12

# of reviews

Pros

Cons

Adobe Systems

3.4

Negative

807

Good technology, collaborative culture, work/life balance, compensation and benefits

Recurrent changes in strategy, employee morale hurt by recurring layoffs

SAP

3.4

Negative

664

Great brand and products, work/life balance, employee focused

Process-driven and bureaucratic for some

Salesforce.com

3.4

Negative

469

Great products, competitive yet collaborative environment, good compensation and benefits

High pressure for some, growing organization and changing culture

Visa

2.7

Negative

356

Good brand and benefits

Conservative culture, lack of innovation for some

Source: CareerBliss, Indeed, Glassdoor, UBS

Chart 1: Employee satisfaction scores in the software and services sector

Wipro

Vmware

Visa

Teradata

Tata Consultancy Services

SAP

Salesforce.com

Oracle Corporation

Microsoft

MasterCard

Intuit

Infosys

Dassault Systèmes

Citrix Systems

Adobe Systems

3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2 2.0

Employee satisfaction Source: Glassdoor, CareerBliss, Indeed. In light blue are companies for which there are less than 100 reviews UBS 76

Q-Series®: Human Capital 19 August 2013

Table 2: Company ratings -– details and number of reviews Normalized weighted average scores

Total # of reviews

Glassdoor employee rating

Glassdoor # of reviews

Indeed rating

Indeed # of reviews

CareerBliss rating

CareerBliss # of reviews

Adobe Systems Inc.

3.4

807

3.7

610

4.0

169

Citrix Systems Inc.

3.3

473

3.7

334

n/a

3.7

139

Dassault Systèmes

3.2

108

3.5

n/a

3.9

Infosys Ltd

2.9

4842

3.1

3738

4.0

275

3.8

829

Intuit Inc.

3.4

1247

3.7

941

4.0

3.9

227

MasterCard Inc.

3.2

120

3.5

120

n/a

Microsoft Corp.

3.2

5553

3.5

4211

4.0

200

3.8

1142

Oracle Corporation

3.0

3415

3.2

2676

4.0

103

3.8

636

Salesforce.com

3.4

469

3.7

433

n/a

4.0

SAP AG

3.4

664

3.7

487

4.2

4.0

126

Tata Consultancy Services

3.0

2692

3.3

1902

4.0

427

3.8

363

Teradata Corporation

3.2

120

3.5

120

n/a

Visa Inc.

2.7

356

2.6

243

4.1

4.0

VMWare, Inc

3.0

819

3.3

717

4.0

3.7

Wipro Ltd.

2.8

2896

3.0

1758

3.9

547

3.7

591

Sector average

3.1

3.4

4.0

3.9

Average – all sectors

3.0

3.3

4.0

3.7

Standard deviation – all sectors

0.3

0.2

Companies

Source: CareerBliss, Glassdoor, Indeed, UBS

Chart 2: Evolution of Glassdoor company ratings for selected companies 4.5 4.0 Av erage (2008-12)

3.5

2011

3.0

2012

Wipro Ltd

Visa Inc

Citrix Systems

SAP AG

Adobe Systems

Intuit

2.0

Salesforce.com

2.5

Source: Glassdoor

UBS 77

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Telecom services Human capital materiality scorecard Labour relations, working conditions

Availability of skilled labour

Importance of innovation

•

Customer focus (services)

•

Source: UBS Global ESG Analyser survey

Companies to watch In the telecom services sector, employee satisfaction scores for all companies in the sample lie within one standard deviation of the sector average – i.e. they are not meaningfully different from the mean. Chart 1: Employee satisfaction scores in the telecom services sector

Employee satisfaction 3.4 3.2 3.0 2.8 2.6 2.4 2.2 Vodafone

Verizon Communications

Telstra

Orange

AT&T

2.0

Source: Glassdoor, CareerBliss, Indeed. In light blue are companies for which there are less than 100 reviews

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Table 2: Company ratings – details and number of reviews Normalized weighted average scores

Total # of reviews

Glassdoor employee rating

Glassdoor # of reviews

Indeed rating

Indeed # of reviews

CareerBliss rating

CareerBliss # of reviews

AT&T Inc.

2.9

7918

2.9

1774

1658

3.7

4486

BT Group

2.9

247

3.1

156

n/a

3.7

Orange

3.2

3.4

n/a

3.9

Telstra Corp. Limited

3.0

3.3

n/a

Verizon Comm.

2.8

2590

3.0

1313

709

3.6

568

Vodafone Group

3.2

368

3.6

189

144.0

3.8

Sector average

3.0

3.2

4.0

3.7

Average – all sectors

3.0

3.3

4.0

3.7

Standard deviation – all sectors

0.3

0.2

Companies

Source: CareerBliss, Glassdoor, Indeed, UBS

Chart 2: Evolution of Glassdoor company ratings for selected companies 3.4 3.2 3.0 2.8

Average (2008-12)

2.6

2011

2.4

2012

2.2 2.0 1.8

AT&T

Verizon Communications

Source: Glassdoor

UBS 79

Q-Series®: Human Capital 19 August 2013

Appendix

UBS 80

Q-Series®: Human Capital 19 August 2013

Case studies Home Depot’s customer-focused culture Home Depot’s experience under the leadership of Robert Nardelli (CEO from 2000 to 2007) is an oft-cited example demonstrating the importance of employees as a success factor in retail24. Under the management of the founders, the corporate culture at Home Depot was entrepreneurial and customer focused. Our analyst Michael Lasser quotes the company as saying: “take care of your customers, take care of your associates, and everything else will take care of itself”. When Bob Nardelli took over the management of Home Depot, the culture seemed to change significantly, as the focus shifted to efficiency rather than customer service25. Staff levels in stores were cut and the number of parttimers increased, which had the effect of reducing the number and availability of experienced employees in the stores26. As a symptom of the cultural change, Home Depot lost eight points in the American customer satisfaction index from 2001 to 2005, bottoming at 67 and trailing 11 points behind Lowe’s, a close peer. Interestingly, the relative share price performance of the two companies seems to follow a similar pattern to their relative customer satisfaction scores, although of course it is not the only factor at play. Chart 18: Relative share price performance (%): Home Depot vs. Lowe’s

Chart 19: Consumer satisfaction index: Lowe’s vs. Home Depot

30 20

81 79

71 69 67

Source: Bloomberg

Lowe's

2011

2009

Jan-12

-50

2007

65 2005

-40

2003

-30

2001

-20

Jan-11

Jan-10

Jan-09

Jan-08

Jan-07

Jan-06

Jan-05

Jan-04

Jan-03

-10

Jan-02

Home Depot

Source: American Consumer Satisfaction Index

Since 2007, Frank Blake, the new CEO, has been successful at reviving Home Depot’s customer culture. Customer satisfaction bounced back to higher levels, reaching 78 points in 2011, according to the ACSI. UBS analyst Michael Lasser notes in his initiation report in June 2011 that “under the leadership of Frank Blake and the rest of the management team, the company has made a variety of

See for example Zeynep Ton, Why good jobs are good for retailers, Harvard Business Review, 2012

http://knowledge.wharton.upenn.edu/article.cfm?articleid=1636

http://money.cnn.com/2008/09/18/magazines/fortune/fortune500/reingold_homedepot500.fortune/index2.htm UBS 81

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investments in the business, including a maintained commitment to store labour, implementing better merchandising tools, and erecting an advanced supply chain” (It’s good to be home, Lasser, June 2011). According to the Seattle Times, steps taken by Frank Blake included giving more power to store managers, granting restricted stock to assistant store managers, making it easier for store employees to win bonuses, as well as refocusing the performance appraisal metrics onto customer satisfaction27.

http://seattletimes.com/html/businesstechnology/2012783334_homedepotprofilte05.html UBS 82

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Statement of Risk

In addition to the specific risks and limitations already discussed in this report (including those on page 27), the immediate risk in relation to the subject-matter covered by UBS's Global Sustainability Team arises from the lack of definition in the field, reflected in the many names and acronyms in use by practitioners: Sustainability; Responsible Investment (RI); Socially Responsible Investment (SRI); ESG (Environmental, Social and Governance) Investment; Ethical Investing, Impact Investing and so on. The field covers an enormous range of potential issues, and, over time, their importance fluctuates. At the time of writing, we believe the issues raised in this research to be relevant to investors, but this may change. Additionally, this research should not be read as a complete or definitive account of all relevant issues for firms. Although we attempt to address all significant or nascent issues, these may not always be apparent, and these may change over time. Finally, this document should not be interpreted to mean that all the issues addressed in our research have a financial impact. Whether or not environmental, social and governance issues have a financial impact remains an open question as there is no accepted financial model that can determine whether any given issue - ESG or otherwise - is already reflected in share prices.

Analyst Certification

Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to UBS, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.

UBS 83

Q-Series®: Human Capital 19 August 2013

Required Disclosures This report has been prepared by UBS Limited, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co. Limited is licensed to conduct securities investment consultancy businesses by the China Securities Regulatory Commission. UBS Investment Research: Global Equity Rating Allocations UBS 12-Month Rating Buy Neutral Sell UBS Short-Term Rating Buy Sell

Rating Category Buy Hold/Neutral Sell Rating Category Buy Sell

Coverage 46% 44% 10% 3 Coverage less than 1% less than 1%

IB Services 35% 37% 21% 4 IB Services 33% 20%

1:Percentage of companies under coverage globally within the 12-month rating category. 2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. 3:Percentage of companies under coverage globally within the Short-Term rating category. 4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months. Source: UBS. Rating allocations are as of 30 June 2013.

UBS Investment Research: Global Equity Rating Definitions UBS 12-Month Rating Buy Neutral Sell UBS Short-Term Rating Buy Sell

Definition FSR is > 6% above the MRA. FSR is between -6% and 6% of the MRA. FSR is > 6% below the MRA. Definition Buy: Stock price expected to rise within three months from the time the rating was assigned because of a specific catalyst or event. Sell: Stock price expected to fall within three months from the time the rating was assigned because of a specific catalyst or event.

UBS 84

Q-Series®: Human Capital 19 August 2013

KEY DEFINITIONS Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months. EXCEPTIONS AND SPECIAL CASES UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece.

Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualified as research analysts with the NASD and NYSE and therefore are not subject to the restrictions contained in the NASD and NYSE rules on communications with a subject company, public appearances, and trading securities held by a research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any, follows. UBS Limited: Hubert Jeaneau; Julie Hudson, CFA. UBS Securities LLC: Eva Tiffany Zlotnicka.

UBS 85

Q-Series®: Human Capital 19 August 2013

Company Disclosures Company Name 4a, 6a, 6c, 7, 16b 3M Company 2, 4a, 5, 6a, 13, 16b, 22 ABB Ltd 4a, 5, 6a, 6c, 7, 16b Abbott Laboratories 16b adidas AG 6c, 7, 16b Adobe Systems Inc. 16b Agilent Technologies Inc. Aker Solutions 16b, 22 Akzo Nobel 6b, 7, 16b, 22 Alcoa Inc. 16b Allergan 16b Altera Corporation 16b, 22 Altria Group 16b Amazon.com 2, 4a, American International Group 6a, 6b, 6c, 7, 16b, 22

16b

AmerisourceBergen Corp. 2, 4a, 5, 6a, 6c, 7, 16b Amgen Inc. 16b Analog Devices Inc. 16b Anheuser-Busch InBev 6c, 7, 16b, 22 Apple Inc. 16b Applied Materials Inc. 14, 16b ARM Holdings Plc 13, 16b AstraZeneca 2, 4a, 6a, 6b, 6c, 7, 16b, 22 AT&T Inc. 16b Atlas Copco A 16b AutoZone Inc. 4a, 5, 6a, 14, 16b BAE SYSTEMS 6a, 6b, 6c, 7, 16b Baker Hughes Inc. 2, 4a, 5, 6a, 6b, Bank of America Corp. 6c, 7, 16b

16b, 18e

Barclays 16b Barnes & Noble, Inc. 4a, 5, 6a, 14, 16b BASF SE 4a, 8, 14, 16b, 18h BAT UK 2, 4a, 5, 6a, 6b, Baxter International Inc. 6c, 7, 16b

5, 6a, 16b

Bayer 4a, 6a, 16b BE Aerospace Inc. 6a, 6c, 7, 16b Best Buy Co. Inc. 4a, 5, 6a, 16b BHP Billiton Plc 5, 6c, 7, 16b Biogen Idec Inc. 2, 4a, 5, 6a, 16b BMW 2, 4a, 6a, 6c, 7, 8, 16b, 22 Boeing Co. 2, 4a, 5, 6a, 6b, Boston Scientific Corp. 6c, 7, 16b

2, 4a, 5, 6a, 14, 16b

BP 4a, 6a, 6b, 6c, 7, Bristol-Myers Squibb

16b

Broadcom Corporation 5, 16b BT Group 2, 4a, 5, 6a, 6c, 7, 16b Cardinal Health, Inc. 2, 4a, 5, 6a, 6c, CareFusion Corporation 7, 16b

Caterpillar Inc.

6b, 7, 8, 16b

Reuters MMM.N ABBN.VX ABT.N ADSGn.DE ADBE.O A.N AKSO.OL AKZO.AS AA.N AGN.N ALTR.O MO.N AMZN.O

12-mo rating Short-term rating Buy N/A Buy N/A Not Rated N/A Buy N/A Buy N/A Buy N/A Neutral N/A Sell N/A Neutral N/A Buy N/A Not Rated N/A Not Rated N/A Neutral N/A

Price US$115.90 CHF20.92 US$34.97 €83.19 US$45.40 US$46.79 NKr89.95 €47.60 US$8.12 US$87.93 US$35.00 US$34.29 US$284.82

Price date 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013

AIG.N

Neutral

N/A

US$47.10

16 Aug 2013

ABC.N AMGN.O ADI.O ABI.BR AAPL.O AMAT.O ARM.L AZN.L T.N ATCOa.ST AZO.N BAES.L BHI.N

Neutral Buy Neutral Buy Buy Neutral Buy Buy Neutral Sell Neutral Buy Buy

N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

US$56.53 US$104.91 US$48.31 €73.99 US$502.33 US$15.62 870p 3,200p US$34.18 SKr177.50 US$416.52 437p US$46.86

16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013

BAC.N

Neutral

N/A

US$14.42

16 Aug 2013

BARC.L BKS.N BASFn.F BATS.L

Neutral Not Rated Neutral Buy

N/A N/A N/A N/A

288p US$17.54 €68.00 3,398p

16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013

BAX.N

Not Rated

N/A

US$71.12

16 Aug 2013

BAYGn.F BEAV.O BBY.N BLT.L BIIB.O BMWG.F BA.N

Neutral Buy Neutral Buy Neutral Neutral Neutral

N/A N/A N/A N/A N/A N/A N/A

€86.50 US$69.24 US$30.37 1,988p US$206.89 €75.29 US$103.47

16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013

BSX.N

Not Rated

N/A

US$11.06

16 Aug 2013

BP.L

Buy

N/A

442p

16 Aug 2013

BMY.N

Neutral

N/A

US$41.68

16 Aug 2013

BRCM.O BT.L CAH.N

Neutral Neutral Buy

N/A N/A N/A

US$25.91 326p US$51.32

16 Aug 2013 16 Aug 2013 16 Aug 2013

CFN.N

Not Rated

N/A

US$35.82

16 Aug 2013

CAT.N

Neutral

N/A

US$85.16

16 Aug 2013

UBS 86

Q-Series®: Human Capital 19 August 2013

Company Name 4a, 5, 6a, 6c, 7, 16b Celgene Corporation 16b Cerner Corp. 5, 6b, 6c, 7, 16b Chevron Corp. 4a, 6a, 6b, 6c, 7, 8, 16b Cisco Systems Inc. 2, 4a, 5, 6a, 6b, 6c, 7, 16b Citigroup Inc 6c, 7, 16b Citrix Systems Inc. 16b Coach Inc. 4a, 6a, 6b, 6c, 7, 16b Coca-Cola Co. 16b Colgate-Palmolive 2, 4a, 5, 6a, 6b, 6c, 7, 16b ConocoPhillips 16b Corning Inc. 16b Costco Wholesale Corp 16b CVS Caremark Corporation 16b Daimler AG 6a, 6c, 7, 16b Danaher Corporation 16b Dassault Systèmes 8, 16b Deere & Co. 4a, 6a, 6c, 7, 16b Dell Inc. 2, 4a, 5, 16b, 18d, 22 Deutsche Bank 2, 4a, 5, 6a, 14, 16b Diageo 6b, 6c, 7, 8, 16b Dow Chemical 2, E I du Pont de Nemours and Co 4a, 6a, 6b, 6c, 7, 8, 16b

16b

Edwards Lifesciences Corp 2, 4a, 5, 6a, 6b, 6c, 7, 16b EMC Corporation 5, 6a, 6c, 7, 16b Emerson Electric Co. 16b Ericsson 6a, 16b Express Scripts Inc. 6b, 7, 16b ExxonMobil Corp. 6a, 6c, 7, 16b FMC Technologies Inc. 6a, 6b, 6c, 7, 16b Ford Motor Co. 16b Gap Inc. 16b General Dynamics Corp. 2, 4a, 5, 6a, 6b, 6c, 7, General Electric Co. 16b, 22

Reuters CELG.O CERN.O CVX.N CSCO.O C.N CTXS.O COH.N KO.N CL.N COP.N GLW.N COST.O CVS.N DAIGn.F DHR.N DAST.PA DE.N DELL.O DBKGn.DE DGE.L DOW.N

12-mo rating Short-term rating Neutral N/A Neutral N/A Neutral N/A Buy N/A Buy N/A Neutral N/A Neutral N/A Not Rated N/A Not Rated N/A Sell N/A Buy N/A Buy N/A Buy N/A Buy N/A Buy N/A Neutral N/A Sell N/A Neutral N/A Neutral N/A Neutral N/A Buy N/A

Price US$132.49 US$47.38 US$119.88 US$24.27 US$50.35 US$71.60 US$51.90 US$39.05 US$59.47 US$67.38 US$15.03 US$111.90 US$58.57 €55.19 US$66.73 €99.99 US$84.11 US$13.82 €34.16 2,011p US$36.89

Price date 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013

DD.N

Neutral

N/A

US$58.28

16 Aug 2013

EW.N EMC.N EMR.N ERICb.ST ESRX.O XOM.N FTI.N F.N GPS.N GD.N

Not Rated Buy Neutral Neutral Buy Neutral Buy Buy Neutral Buy

N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

US$70.01 US$25.88 US$61.27 SKr80.00 US$64.61 US$87.91 US$53.25 US$16.30 US$43.12 US$83.75

16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013

GE.N

Buy

N/A

US$23.95

16 Aug 2013

GM.N

Buy

N/A

US$34.38

16 Aug 2013

GILD.O GSK.L

Buy Neutral

N/A N/A

US$56.91 1,655p

16 Aug 2013 16 Aug 2013

GS.N

Neutral

N/A

US$160.66

16 Aug 2013

GOOG.O HMb.ST HAL.N HCA.N HSIC.O HPQ.N HD.N

Buy Buy Buy Buy Neutral Neutral Buy

N/A N/A N/A N/A N/A N/A N/A

US$856.91 SKr243.20 US$46.95 US$37.90 US$103.20 US$26.42 US$75.38

16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013

HON.N

Neutral

N/A

US$81.96

16 Aug 2013

HSBA.L ITW.N ITX.MC INFY.BO INTC.O

Neutral Neutral Neutral Buy Neutral

N/A N/A N/A N/A N/A

709p US$72.43 €102.75 Rs3,005.45 US$21.92

16 Aug 2013 16 Aug 2013 16 Aug 2013 19 Aug 2013 16 Aug 2013

4a, 5, 6a, 6b,

General Motors Company

6c, 7, 16b

16b

Gilead Sciences 2, 4a, 5, 6a, 14, 16b GlaxoSmithKline 2, 4a, 6a, Goldman Sachs Group Inc. 6b, 6c, 7, 16b, 22

4a, 6a, 6b, 6c, 7, 16b, 22

Google Inc 16b H&M 16b Halliburton Co. 2, 4a, 5, 6a, 16b HCA Holdings 16b Henry Schein Inc. 4a, 5, 6a, 6b, 6c, 7, 16b Hewlett-Packard 16b Home Depot Inc. 6b, 6c, 7, Honeywell International Inc. 16b

2, 3g, 4a, 6a, 16a, 16b, 22

HSBC 2, 4a, 6a, 16b, 18g Illinois Tool Works Inditex SA 16b Infosys Ltd 4a, 6a, 6b, 6c, 7, 8, 16b, 18a Intel Corp.

UBS 87

Q-Series®: Human Capital 19 August 2013

Company Name International Business Machines 3h, 4a, 6a, 6b, 6c, 7, 12, 16b Corp. 16b Intuit Inc. 5, 6b, 7, 16b Johnson & Johnson 16b Johnson Controls Inc. 16b Johnson Matthey 2, 4a, 5, 6a, 6b, JPMorgan Chase & Co. 6c, 7, 16b, 22

6c, 7, 16b

Kraft Foods Group Inc. Laboratory Corporation of 16b America Hldg 4a, 5, 6a, 6b, 6c, 7, 16b Lilly (Eli) & Co. 16b, 22 Linde 4a, 6a, 6b, 6c, 7, Lockheed Martin Corp. 16b

16b

L'Oréal 16b Lowe's Companies, Inc. 16b lululemon athletica 5, 16b Luxottica 16b LyondellBasell Industries 16b Marks & Spencer 4a, 6a, 16b MasterCard Inc. 16b McKesson Corporation 2, 4a, 6a, 6b, 6c, 7, 16b Medtronic, Inc. 2, 4a, 5, 6a, 6b, 6c, 7, 16b Merck & Co. 2, 4a, 5, 6a, 6b, 6c, 7, 13, 16b, 22 MetLife 2, 4a, 5, 6a, 6b, 6c, 7, 16b, 22 Microsoft Corp. 16b Monsanto Co. 13, 16b Mosaic Co 2, 4a, 5, 16b, 22 Nestlé 16b Nike Inc. 16b Northrop Grumman Corp. 2, 3b, 4a, 5, 6a, 13, 16b, 18b, 22 Novartis 16b Novo Nordisk 16b Novozymes A/S 4a, 5, 6a, Occidental Petroleum Corp. 16b, 22

16b, 20

Office Depot, Inc. 5, 16b, 20 OfficeMax Incorporated 2, 4a, 6a, 6b, 6c, 7, 16b Oracle Corporation 16b Orange 2, 4a, 6a, 6b, 6c, 7, 16b PepsiCo Inc. 6b, 7, 16b Pfizer Inc. 2, 4a, 16b, Philip Morris International 22

8, 16b

PPG Industries Inc. 2, 4a, 5, 6a, 6b, 6c, 7, 16b Procter & Gamble 6b, 7, 16b Qualcomm Inc. 16b Quest Diagnostics 4a, 6a, 6b, 6c, 7, 12, 16b Ralph Lauren 2, 4a, 6a, 6c, 7, 16b Raytheon Co. 2, 4a, 4b, 5, 6a, 16b RBC Financial Group 2, 3d, 4a, 5, 6a, 14, 16b, 22 RBS Group 8, 16b Reckitt Benckiser 16b Regeneron Pharmaceuticals 8 Rio Tinto Limited

Reuters

12-mo rating Short-term rating

Price

Price date

IBM.N

Buy

N/A

US$185.34

16 Aug 2013

INTU.O JNJ.N JCI.N JMAT.L

Buy Not Rated Neutral Buy

N/A N/A N/A N/A

US$64.24 US$89.37 US$40.54 2,776p

16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013

JPM.N

Buy

N/A

US$53.29

16 Aug 2013

KRFT.O

Not Rated

N/A

US$52.77

16 Aug 2013

LH.N

Neutral

N/A

US$96.86

16 Aug 2013

LLY.N LING.DE

Neutral Neutral

N/A N/A

US$52.86 €145.85

16 Aug 2013 16 Aug 2013

LMT.N

Sell

N/A

US$122.20

16 Aug 2013

OREP.PA LOW.N LULU.O LUX.MI LYB.N MKS.L MA.N MCK.N MDT.N MRK.N MET.N MSFT.O MON.N MOS.N NESN.VX NKE.N NOC.N NOVN.VX NOVOb.CO NZYMb.CO

Neutral Buy Neutral Neutral Neutral Buy Neutral Buy Not Rated Buy Buy Buy Neutral Neutral Neutral Buy Neutral Buy Buy Sell

N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

€129.45 US$43.96 US$70.13 €41.35 US$68.87 453p US$618.21 US$121.82 US$53.91 US$47.70 US$48.28 US$31.80 US$94.99 US$42.87 CHF62.10 US$63.65 US$94.02 CHF67.65 DKr985.00 DKr209.20

16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013

OXY.N

Neutral

N/A

US$86.51

16 Aug 2013

ODP.N OMX.N ORCL.N ORAN.PA PEP.N PFE.N

Neutral (CBE) Neutral (CBE) Buy Sell Not Rated Buy

N/A N/A N/A N/A N/A N/A

US$4.29 US$11.13 US$32.41 €7.97 US$80.18 US$28.37

16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013

PM.N

Neutral

N/A

US$85.75

16 Aug 2013

PPG.N PG.N QCOM.O DGX.N RL.N RTN.N RY.TO RBS.L RB.L REGN.O RIO.AX

Neutral Not Rated Buy Neutral Buy Neutral Not Rated Buy Buy Neutral Buy

N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

US$158.59 US$79.90 US$66.90 US$58.09 US$172.08 US$76.74 C$64.36 343p 4,460p US$230.98 A$60.14

16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 19 Aug 2013

UBS 88

Q-Series®: Human Capital 19 August 2013

Company Name 4a, 5, 16b, 22 Roche 4a, 5, 6a, 6b, 6c, 7, Rockwell Collins Inc.

8, 16b

Rolls-Royce 4a, 6a, 16b Royal Dutch Shell 16b Safeway Inc. 3e, 4a, 5, 6a, 14, 16b Sainsbury J 16b Salesforce.com 16b Sanofi 2, 4a, 6a, 16b SAP AG 16b Schlumberger Ltd. 16b Schneider Electric 16b Shire Pharmaceuticals 2, 3c, 4a, 5, 6a, 14, 16b Siemens 5, 6a, 14, 16b Smith & Nephew 16b St. Jude Medical, Inc. 2, 4a, 14, 16a, 16b Standard Chartered 16b Staples Inc. 16b Stryker Corporation 16b Suncor Energy Inc. 16b, 20 SUPERVALU Inc. 4a, 5, 16b, 18c Syngenta 16b, 22 Target Corporation Tata Consultancy Services Ltd. 16b Tata Motors Ltd. 4a, 16b, Telstra Corporation Limited 22

16b

Teradata Corporation 3a, 16b Tesco 16b Texas Instruments Inc. Thales 16b The Kroger Co. 16b The TJX Companies, Inc. 16b Thermo Fisher Scientific Inc. 4a, 6a, 6b, 6c, 7, Travelers Companies 16b

16b

Under Armour, Inc. 4a, 6a, 16b Unilever NV 4a, 6a, 8, United Technologies Corp.

16b

Verizon Communications

Reuters ROG.VX

12-mo rating Short-term rating Neutral N/A

Price CHF236.20

Price date 16 Aug 2013

COL.N

Buy

N/A

US$72.56

16 Aug 2013

RR.L RDSa.L SWY.N SBRY.L CRM.N SASY.PA SAPG.DE SLB.N SCHN.PA SHP.L SIEGn.DE SN.L STJ.N STAN.L SPLS.O SYK.N SU.TO SVU.N SYNN.VX TGT.N TCS.BO TAMO.BO

Sell Neutral Sell Buy Buy Buy Neutral Buy Neutral Buy Buy Neutral Not Rated Buy Neutral Not Rated Not Rated Neutral (CBE) Sell Neutral Buy Buy

N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

1,121p 2,050p US$26.66 384p US$43.83 €77.75 €57.10 US$81.92 €61.10 2,385p €83.57 780p US$51.47 1,552p US$16.84 US$67.97 C$35.33 US$7.46 CHF369.70 US$68.58 Rs1,777.90 Rs301.60

TLS.AX

Sell

N/A

A$4.91

19 Aug 2013

TDC.N TSCO.L TXN.O TCFP.PA KR.N TJX.N TMO.N

Neutral Buy Neutral Neutral Neutral Buy Buy

N/A N/A N/A N/A N/A N/A N/A

US$61.69 368p US$38.74 €38.71 US$38.25 US$50.48 US$90.69

16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013

TRV.N

Buy

N/A

US$81.10

16 Aug 2013

UA.N UNc.AS

Neutral Buy

N/A N/A

US$68.93 €29.72

16 Aug 2013 16 Aug 2013

UTX.N

Buy

N/A

US$103.08

16 Aug 2013

VZ.N

Neutral

N/A

US$47.71

16 Aug 2013

VRTX.O V.N VMW.N VOD.L VOLVb.ST WAG.N WMT.N

Neutral Neutral Buy Buy Neutral Buy Buy

N/A N/A N/A N/A N/A N/A N/A

US$76.51 US$173.13 US$83.97 192p SKr98.10 US$48.84 US$74.11

16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013 16 Aug 2013

WFT.N

Neutral

N/A

US$14.58

16 Aug 2013

WFC.N

Neutral

N/A

US$42.75

16 Aug 2013

WFM.O WIPR.BO WOW.AX

Buy Buy Neutral (CBE)

N/A N/A N/A

US$52.96 Rs455.80 A$33.63

16 Aug 2013 19 Aug 2013 19 Aug 2013

2, 4a, 5, 6a,

6c, 7, 16b

16b

Vertex Pharmaceuticals Inc. 6a, 6b, 6c, 7, 16b Visa Inc. 13, 16b VMware, Inc 3f, 4a, 5, 12, 16b, 18f Vodafone Group 6a, 16b Volvo B 16b Walgreen Co. 2, 4a, 5, 6a, 6b, 6c, 7, 16b Wal-Mart Stores 4a, 5, Weatherford International Ltd. 6a, 6c, 7, 16b

2, 4a, 5, 6a, 6b,

Wells Fargo & Company

6c, 7, 16b, 22

Whole Foods Market, Inc. 16b Wipro Ltd. 20 Woolworths Limited

16b

UBS 89

Q-Series®: Human Capital 19 August 2013

Company Name 16b Zimmer Holdings, Inc.

Reuters ZMH.N

12-mo rating Short-term rating Not Rated N/A

Price US$79.54

Price date 16 Aug 2013

Source: UBS. All prices as of local market close. Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date 2.

UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of this company/entity or one of its affiliates within the past 12 months.

3a.

UBS AG Hong Kong Branch is acting as Financial Advisor to China Resources Enterprise on the potential merger of China Resources Vanguard with Tesco's Chinese operations.

3b.

UBS AG is acting as agent on the announced share buy-back programme of Novartis AG

3c.

UBS Deutschland AG is currently acting as advisor to Siemens AG

3d.

UBS Limited is acting as advisor to Royal Bank of Scotland Group on the sale of part of its UK banking business comprising certain branches, SME customers and supporting infrastructure

3e.

UBS Limited is acting as financial adviser to J Sainsbury on the acquisition of the 50% of Sainsbury's Bank they do not already own from Lloyds Banking Group.

3f.

UBS Limited is advising Vodafone in respect of its discussions with Kabel Deutschland Holding AG

3g.

UBS Securities LLC is acting as advisor to Bancolombia on its announced agreement to acquire HSBC's Panama assets.

3h.

UBS Securities LLC is acting as advisor to Trusteer on its announced agreement to be acquired by International Business Machine.

4a.

Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking services from this company/entity.

4b.

Within the past 12 months, UBS Securities Canada Inc or an affiliate has received compensation for investment banking services from this company/entity.

UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services from this company/entity within the next three months.

6a.

This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking services are being, or have been, provided.

6b.

This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-investment banking securities-related services are being, or have been, provided.

6c.

This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securities services are being, or have been, provided.

Within the past 12 months, UBS Securities LLC has received compensation for products and services other than investment banking services from this company/entity.

The equity analyst covering this company, a member of his or her team, or one of their household members has a long common stock position in this company.

12.

An employee of UBS AG is an officer, director, or advisory board member of this company.

13.

UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of this company`s common equity securities as of last month`s end (or the prior month`s end if this report is dated less than 10 days after the most recent month`s end).

14.

UBS Limited acts as broker to this company.

16a.

UBS Securities (Hong Kong) Limited is a market maker in the HK-listed securities of this company.

16b.

UBS Securities LLC makes a market in the securities and/or ADRs of this company.

18a.

The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Intel Corp.

18b.

UBS AG is acting as agent in regard to Novartis AG's announced share buyback programme.

18c.

UBS AG is acting as an agent in regard to the company's announced share buy-back programme.

18d.

UBS AG, its affiliates or subsidiaries beneficially owned 5.26% of this company`s voting rights as of last month`s end.

18e.

UBS has been granted conditional leniency or conditional immunity from antitrust authorities in certain jurisdictions in connection with potential antitrust or competition law violations related to certain benchmark submissions. For further information, please see UBS's Q2 2012 disclosure.

18f.

UBS Limited is acting as agent on Vodafone Group Plc's announced share buyback programme.

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18g.

UBS Securities LLC is a named advisor to Clayton, Dubilier & Rice for its announced agreement to acquire Wilsonart International from Illinois Tool Works and is also providing financing.

18h.

UBS South Africa (Pty) Limited acts as JSE sponsor to this company.

20.

Because this security exhibits higher-than-average volatility, the FSR has been set at 15% above the MRA for a Buy rating, and at -15% below the MRA for a Sell rating (compared with 6/-6% under the normal rating system).

22.

UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month`s end (or the prior month`s end if this report is dated less than 10 working days after the most recent month`s end).

This report was sent to the issuer prior to publication solely for the purpose of checking for factual accuracy, and no material changes were made to the content based on the issuer's feedback. Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report.

For a complete set of disclosure statements associated with the companies discussed in this report, including information on valuation and risk, please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention: Publishing Administration.

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