Should You Measure the Financial Returns of Safety?

Safety and Financial Returns
October 15, 2019
By Jean-Grégoire Manoukian

“I don’t throw darts at a board. I bet on sure things.”
~Michael Douglas as Gordon Gecko in “Wall Street”

We’re all familiar with the 2007-2009 Great Recession. Some say that we’re still feeling its effects today in terms of slower wage growths and income inequality.

But before the Great Recession, there was the Dotcom Bubble that burst.

The dotcom crash lasted from 2000 to 2004. Some people remember it well, especially if they worked in IT or telecommunications. Others remember it also. Just ask anyone who had shares in solid, reliable companies like Nortel, Cisco, Intel and Oracle, and who saw their portfolio lose 80% of its value (shares of some of these firms have since regained their value).

I remember living through the dotcom crash….at a telecom company. Luckily our small Canadian firm did not go through massive layoffs.

The founders of the company were determined to limit any effects on employees. They even went as far as lending money from their personal wealth so our salaries would continue to be paid.

The Mighty CFO

But we did witness one big change, which I’m sure also happened in many companies and industries: The rise of the mighty CFO. CFOs have always been very powerful executives. But the dotcom crash made them even more powerful.

Some CFOs were promoted to CEO positions, while others got a de facto veto over almost all decisions, making them as powerful, if not more powerful, than CEOs.

I don’t know if the “era of the mighty CFO” is over. After all, the economy is doing better and many effects of both the dotcom crash and the Great Recession have receded. But financial considerations behind business decisions remain very important.

This also applies to investments in safety. In an ideal world, the decision to invest in safety should be a no-brainer. You can’t put a price of human life, and a safe working environment results in fewer injuries and fatalities.

It also produces other indirect or potential financial benefits, such as:

  • Reductions in workers’ compensation costs
  • Reductions in insurance costs.
  • Reductions in potential fines.

Add to this a number of other “soft” benefits such as a better reputation and brand image, higher employee engagement and retention, etc.

Unfortunately we don’t live in an ideal world. Executives in many companies are still asking for direct, tangible financial results from investments in safety.

A Hot Topic

The topic is relevant and discussed frequently.

At the Inaugural Research and Innovation Summit hosted in August by the BCSP Foundation, Anthony Veltri, associate professor of Safety, Health and Environmental Management at Oregon State University, spoke about making the business case for safety.

Veltri asked the following question: “Do financial investments in safety bolster or detract from financial performance?”. There are no simple answers. Safety investments do not always boost financial value. But we can’t say that there is no payoff either.

Safety may not always seem to produce financial dividends because many organizations are not effective in calculating the cost of safety issues and the profitability of potential safety investments.

Veltri explained that investments in safety that reduce risks need to be managed differently from investments intended to pay off in the near future (e.g. in one year). Safety investments typically require 3 to 10 years to produce a financial return.

But Veltri also says that it’s normal if safety doesn’t always return a financial benefit. There are other significant and positive outcomes for operational management, corporate reputation, business performance, etc. Ultimately safety must become a factor for business decisions, and vice versa.

In addition, Veltri performed research with industry leaders to develop and test a tool for measuring the effects of investments in safety on business. The classification scheme includes four stages, nine cost factors, and over 50 activity drivers.

The tool will probably be published and available to organizations early next year. Stay tuned!

Veltri concluded his presentation by stressing that safety should be viewed as an enabler of business performance and operational excellence. When organizations practice safety well, and take actions to protect and sustain their workforces, this is an indication that they are performing well in other aspects also.

So, should you measure the financial benefits of safety? Yes, but be sure to set expectations and the proper context upfront. Show the potential financial returns over a 5-10 year period, not over the next few quarters. And finally, frame the financial benefits in operational terms.

Author

JG

Jean-Grégoire Manoukian

Content Thought Leader