A recently published research paper finds that corporate managers will sacrifice workers’ safety in order to meet investor earnings expectations.
The paper authored by Judson Caskey, an associate professor of accounting at UCLA, and N. Bugra Ozel, an assistant professor of accounting at the University of Texas at Dallas, was published in the February issue of the Journal of Accounting and Economics.
Caskey and Ozel, find strong evidence showing that when corporations are in danger of not meeting earnings expectation benchmarks set for them by Wall Street, corporate managers will try to lower costs by increasing employees’ workload and cutting back on safety-related expenditures.
Doing so increases the number of job related injuries or illnesses by between 10 percent and 15 percent.
Earnings benchmarks are set by Wall Street analysts to help investors determine whether to buy or sell stock in companies.
“We know that firms try to meet earnings benchmarks because the benchmarks have implications for the firms,” said Ozel. “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.”
Among the tools that management uses “to ensure that they are going perform at least to the expectation” is their ability to control expenditures.
One way to control expenditures is to reduce spending on equipment maintenance, safety training, and other safety measures, all of which can lead to more on-the-job injuries
Another way is to increase workers’ workload, which lowers labor costs by squeezing more production out of workers.
Making employees work harder can lead to more work injuries, write Caskey and Ozel because as workers are forced to work harder they can “compromise their safety by overextending themselves or by circumventing safety procedures that slow the flow of work.”
“Taken together, the evidence suggests that both pressure to increase worker productivity and cuts to safety-related expenditures contribute to the relation between benchmark beating and workplace safety, said Ozel”
According to the paper, work injuries are 10 percent to 15 percent higher for corporations in danger of not meeting their earnings benchmark compared to those that exceed benchmarks by a comfortable margin.
Caskey and Ozel arrived at their conclusions after studying years of corporate safety data reported to the US Occupational Safety and Health Administration (OSHA) and corporate financial reports.
“There’s clearly an economic trade off,” said Ozel in describing the results of their research. “Managers are there to think about the best interests of their investors, and they have to make a decision of what would be in the best interests of the investors, and sometimes, they might decide to risk injuries.”
The authors also find that there are some exceptions to their overall findings.
The biggest exception is in companies where workers belong to unions. These companies, according to Caskey and Ozel, are less likely to put their workers at risk of injury in order to meet earnings benchmarks.
“This is consistent with unions’ aim to ensure reasonable workloads, work speed, and safety” write Caskey and Ozel. “It is also consistent with the findings in the literature that, compared to non-union workers, union workers are less likely to perceive that taking risks is a part of their job, and unionization leads to fewer workplace injuries.”
“Our evidence suggests that unions mitigate the extent to which pressure to meet earnings expectations translates into reduced safety”, continue the authors.”
Other factors that make it less likely that corporations will reduce worker safety in order to meet earnings benchmark are the strength of a state’s workers’ compensation system and the extent to which a company relies on government contracts for its earnings.
Companies that rely heavily on government contracts are less likely to cut worker safety measures because “government contracts typically include terms that prohibit bids from firms deemed to have unsafe work environments.”
We tend to think of corporate managers as rational players for whom “performance is important” but not so important that they will “sacrifice people’s health for this purpose,” said Ozel. “And (yet in our research) we find quite a significant result — a 10 to 15 percent increase in employee injuries.”