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Why workplace safety incidents damage stock market value

New research shows that failing to manage workplace safety has a negative impact on financial performance in the stock market.

The study, published by Qazi S. Kabir at State University of New York at Oneonta, Kevin Watson at Louisiana Tech University, and Theekshana Somaratna at Rutgers University, focused on financial performance after safety incident announcements. The researchers found that workplace safety incidents are having increasingly strong negative effects on stock market performance, as CSR becomes more and more important to consumers and investors.

In 2015, there were a total of 4,836 fatal workplace injuries, and 2.9 million non-fatal injuries in the USA – accounting for 1.1 million lost work days. For employees, this represents increased healthcare costs, lost wages, and diminished quality of life.

From the perspective of the employer, safety incidents damage a firm’s reputation, imperil goodwill, and as the study confirms, impede performance in the marketplace.

The Occupational Safety and Health Administration (OSHA) and workplace safety

Image: workplace safety incidents

In 1970, the US Congress created the Occupational Safety and Health Administration (OSHA), to ensure health and safety in the workplace.

When OSHA was created, shareholders perceived its creation as harmful to profitability, assuming that firms would incur additional costs to achieve compliance with OSHA regulations. Industries with a bad record on workplace safety, such as durable manufacturing and mining, did indeed suffer market valuation declines after OSHA’s creation.

But while the creation of OSHA had negative effects for the price of stocks in some industries, the reality was that in the early days of OSHA, penalties were very low, and posed little concern for shareholders. From 1971 to 1975, the average penalty for a violation of an OSHA regulation was just $25.68. Unsurprisingly, these penalties did not have a significant impact on industry health and safety investments.

This all changed, however, by the late 1970s, when OSHA began to impose penalties worth millions of dollars. These sorts of penalties began to jeopardize the financial performance of firms, forcing a greater level of health and safety compliance.

Today, OSHA charge increasingly heavy penalties. In 2016, penalties increased by nearly 80%. Dr David Michaels, who was Assistant Secretary of Labor for OSHA stated that “OSHA penalties must be increased to provide a real disincentive for employers accepting injuries and worker deaths as a cost of doing business.”

Fortunately, attitudes towards health and safety in the workplace have changed significantly since the early 1970s. Emerging perspectives highlight the correlation between safe, lean, and quality services with productivity and flexibility. Today, we are reaching a point where compliance with OSHA can boost a firm’s competitive position by helping to protect employees, reduce injuries, reduce lost time, and boost productivity and profitability.

Access to news and financial performance

The new study highlights that as well as the increased importance and visibility of OSHA, the widespread availability of news is also significant for stock market valuation. Industrial accidents that were once only covered in local or regional newspapers can now be broadcast internationally. The researchers give the example of This American Life’s broadcast of “Mr Daisey and the Apple Factory,” which portrayed working conditions at Foxconn Technology Group, an Apple contract manufacturer, in a very negative light (although the story was later retracted as it came to light that much of the content was fabricated).

Safety incidents and financial performance

Image: Arrow.

The researchers found that organizations can expect a 1% decline in stock prices following the announcement of a safety incident. Interestingly, they observed that this pattern has become more pronounced in recent years. They note, ‘While it is hardly surprising that the announcement of a safety incident would result in a decline of a firm’s stock price, the magnitude of the change is substantial, especially in the most recent period. It is evident that due to increased awareness regarding workplace safety facilitated by improved access to information, any negative announcement about workplace safety (irrespective of OSHA’s involvement) is likely to adversely affect the stock performance of a company.’

Implications for supply chain management

The researchers highlight the need for supply chain managers to ensure safe working environments. They argue that operations and supply chain managers must seek ways to improve their workplaces and processes to make them safer. This will not only help a firm to avoid hefty penalties imposed by regulatory agencies, but will also help them to remain competitive as the importance of corporate image and the need to maintain a triple bottom line grows.

Read the research ▶

Read more! This animation is based on “Workplace safety events and firm performance”, published in Journal of Manufacturing Technology Management.

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