Risk attenuation and the reporting of health and safety performance

Sustainalytics Prize for Excellence in Responsible Investment Research: HONOURABLE MENTION

Sharron O’Neill, Macquarie University; Jack Flanagan and Kevin Clarke, University of New South Wales

Key findings

Voluntary disclosure of Occupational Health and Safety (OHS) performance is inadequate for corporate risk management and investor analysis.
Corporate managers have wide discretion over what is reported and how it is measured, leading to conscious or unintentional omissions of critical OHS information.
High hazard industries (mining, utilities, energy) tend to disclose more information, perhaps as a way to preempt investor demand.
Quantity of performance measures did not reflect high quality of reporting.

The authors evaluated corporate OHS performance data reported by Australia’s 50 largest public firms from a range of industries. Data was collected from corporate annual reports between 1997 and 2009, and examined for trends to determine whether the quantity of voluntarily disclosed performance measures leads to comprehensive, high quality reporting. But do multiple measures tell investors what they need to know in order to assess the company’s management of OHS risks? In efforts to distinguish differing reporting quality, O’Neill et al developed a disclosure index from quantitative data relating to OHS outcomes.

Prior research has shown corporations are not reporting comprehensively on corporate social responsibility issues, even though there is clear investor demand. Disasters due to OHS failures are not new, and the cost to investors has risen significantly over the last 30 years. For example, the 2010 Deep Horizon oil rig explosion in which 11 workers died reportedly cost BP $41 billion USD to date, and resulted in investors demanding for better OHS information.

Analysis

The study adds to the growing research on voluntary OHS disclosure, and it highlights the complete discretion corporate managers have in reporting OHS data and selecting performance measures. The authors used two competing theoretical models to analyse the context for reporting decisions:

Capital markets model

Focus on financial analysis: managers are driven to maximise shareholder value, at times at the expense of other stakeholders (employees). They seek to reassure investors the risk of significant failure is low because risk is managed effectively.

Risk attenuation model

Focus on psychological and cultural drivers: Managers are more likely to manipulate OHS reporting so that serious risks are not brought to stakeholders’ attention. Injury outcomes are ‘smoothed’ by aggregation.

Industry research indicates a strong inverse relationship between the effectiveness of managers risk management effort and the frequency and severity of the work-related injuries, i.e. the more lax the risk management, the more serious the injury. Tracking and reporting is complex due to different types of injuries and severities, therefore managers exercise judgment on what is reported. Non-financial measures of injuries can be broadly classified into three types:

Treatment measures

Frequency rates, including classifications such as minor first aid, medical treatment and lost work time. Treatment measures are highly aggregated to rates of ‘recordable injury’ and ‘all injury’ rates

Productivity measures

Duration rates, i.e. how much time out of work

Severity measures

Measures that distinguish high consequence outcomes, e.g. Class 1 – permanent disability; Class 2 – long or short term temporary incapacity, and Class 3 – minor inconvenience

Results

Two-thirds of the firms reported quantitative OHS disclosures in at least one of the years of observation. Industries differed in disclosure rates, and performance measures in many cases were inconsistently reported and poorly defined.

Disclosure by industry was significantly greater in high hazard (materials, energy, utilities) industries compared to the lowmedium hazard (banking, finance, retail, etc.).
Treatment classifications were highly aggregated and medium to low hazard industries were less likely to provide any injury frequency measures.
Lost productivity was stated in only 22 reports overall, suggesting a low disclosure rate. Measures were typically ‘total time lost per million hours worked’.
Severity of injury and illness reporting was poor. Only two firms consistently reported fatality data in all sampled years. Only one firm included classifications of injuries as Class 1 or 2, indicating the reluctance to disclose nonfatal, high consequence injury data.

Research results did not indicate that the quantity of performance measures linked to quality of actual performance. In fact, the voluntary disclosure data showed that investors now have greater difficulty assessing managers’ ability to prevent high consequence injuries. The quantity of data increased over time, but the breadth and scope narrowed, which may be due to the conscious choice of report preparers. Even though high hazard firms were more likely to report and include multiple measures of performance, data was ‘incomplete, unstable and poorly defined.’

Investors are being presented unreliable information that is difficult to compare, for example, a sprained ankle and a broken neck were each reported as an injury, concealing important information needed for OHS risk management. The authors note that further empirical research is necessary to determine whether poor quality reporting is a result of managers’ intention or stakeholders’ weak demand.

Conclusions

The authors conclude the reported voluntary OHS performance measures were inadequate to assess an organisation’s effectiveness in managing OHS risks. Three primary conclusions are noted:

Generally poor non-financial information

Firms used inconsistent terminology and reported incomplete data, making the data unreliable.

‘Smoothed’ reporting

OHS accounting methods tend to aggregate high severity (high consequence) and low severity (low consequence) injuries. Rigorous reporting needs to include both the frequency and severity of injury so that managers are held accountable for OHS risk management.

Potential for mandatory reporting

The study results infer potential mandatory reporting may be necessary to achieve comprehensive, high quality reporting of OHS performance measures.

Regardless of the study’s limitations due to the small sample size and secondary data, the results confirm prior research that the volume of CSR disclosure is not a proxy for quality, demonstrating that increasing numbers of quantitative performance measures do not necessarily reflect a greater breadth of insight into performance.