The struggle between safety and production continues: A new study finds that managers, struggling to meet earnings projections, are willing to sacrifice worker safety and health.
New research conducted by Professors Judson Caskey of the UCLA Anderson School of Management and Naim Bugra Ozel from the Naveen Jindal School of Management at UT Dallas and published in the Journal of Accounting and Economics finds that managers of U.S. companies facing market pressures to meet earnings expectations may risk the health and safety of workers to please investors.
Ozel and Caskey found the cause of the increase in injuries to be related to efforts to increase production and profits by increasing employee workloads and spending less on training or preventative maintenance. Companies that comfortably beat or completely missed analysts’ projections had lower injury and illness rates than those companies which appeared to be scrambling to meet or slight exceed analysts’ projections.
Using injury data from OSHA and companies’ financial data, the researchers examined company spending and worker output. They found that discretionary expenditures are associated with high injuries in firms that meet or just beat expectations, which is consistent with the conclusion that companies reduce safety-related expenditures such as oversight and employee training.
“We know that firms try to meet earnings benchmarks because the benchmarks have implications for the firms,” Ozel said. “If firms do not meet these benchmarks, then investors punish them, and stock prices go down significantly after a miss of earnings expectations. That gives managers incentive to use the tools they have to ensure they are going to perform at least to the expectations.”
The study also found that higher employee output is associated with higher rates of injuries in these firms.
“Our research suggests that there is also an increase in the workload of the employees, so it’s not just cutting expenditures, but asking employees to work a little harder,” Ozel said. “That might be in the form of overtime, or that might be in the form of putting in more work in a shorter time period. If employees are forced to work harder, they might inadvertently ignore the safety procedures themselves.”
The researchers identified three factors that affect the relationship between injuries and meeting or just beating expectations.
- The relationship is weaker in highly unionized industries, which relates to unions’ role in negotiating for and enforcing safety measures.
- The relationship is weaker in firms with a large amount of government contracts, which relates to the government requiring certain safety standards.
- The relationship is weaker in states where injuries translate into higher workers' compensation costs.
Ozel said the study shows one way that companies deal with the pressure to meet earnings expectations. Missing expectations not only means lower stock prices, but also can affect CEO career outcomes.
“When we think about firms, we always think, ‘These are rational players, so performance is important, but they will not sacrifice people’s health for this purpose,’” Ozel said. “You may be able to think of some anecdotes where companies might be willing to sacrifice employees’ safety, but we looked at a large sample. And in this sample, we find quite a significant result – a 10 to 15 percent increase in employee injuries.
“There’s clearly an economic trade-off. Managers are there to think about the best interest of their investors, and they have to make a decision of what would be in the best interest of the investors, and sometimes they might decide to risk injuries.”
In an article written for The Pump Handle, a blog for those interested in public health and the environment, Garrett Brown noted, “Accounting professors have confirmed what we always suspected: companies which are scrambling to meet or just beat Wall Street analysts’ profit projections have worker injury rates that are 12 percent higher than other employers.” Brown is certified industrial hygienist who worked for Cal/OSHA for 20 years as a field compliance safety and health officer and then served as special assistant to the chief of the division before retiring in 2014.
According to Brown, “Caskey and Ozel’s findings are the flip side of the often-cited but less frequently followed ‘business case for safety,’ which has shown for two decades now that employer spending on health and safety programs generates two to three times the return on the investment. Effective safety programs reduce the number of injuries, illnesses and fatalities; they reduce all the associated costs, including medical expenses, workers’ compensation and regulatory fines; they increase productivity, and thereby increase profits and stock price; they result in higher employee morale, higher retention rates, lower absenteeism and reduced turn-over and training costs; and they help safer companies attract new talent and improve their corporate reputation.”