Last Updated on December 2, 2024
Overview – Safety: Buzzword or Keyword?
When examining a potential investment, there are many factors investors must look at before making a decision.
Conventional measures of investment merit such as earnings, debt levels, free cash flow, and business prospects are all carefully weighed and analyzed. As important as those are, there is one factor that is arguably just as important yet remains largely overlooked: safety.
“Safety” in this context doesn’t refer to the risk posed by the investment itself, but rather the day-to-day operations of the underlying business. So, for example, if an investor was contemplating purchasing shares of a mining company, then “safety” in this scenario would refer to its daily mining operations.
Most investors don’t exercise direct control over the companies in their portfolios, let alone have the authority to influence safety policy, so why should they concern themselves over safety? This is because a company’s safety record and safety culture can have a direct impact on its financial performance, and by extension, its investment merit.
Alcoa: Safety Begetting Financial Success
In 1987, the Aluminum Company of America (Alcoa) appointed a new CEO: Paul H. O’Neill.
In October 1987, O’Neill was introduced to a group of investors and analysts and was famously known to have started his speech by first saying “I want to talk to you about worker safety“. He goes on to talk about his intention to make Alcoa the safest place to work in America, sharing his ambition to drop injuries to zero.
One attendee asked about inventories and another talked about capital ratios, but O’Neill quickly rebutted these individuals by saying “I’m not certain you heard me”, and continued by saying “If you want to understand how Alcoa is doing, you need to look at our workplace safety figures…..Safety will be an indicator that we’re making progress in changing our habits across the entire institution. That’s how we should be judged.”
Not everyone in the room took his message too kindly. Charles Duhigg covers the story of Paul O’Neill and Alcoa in his book The Power of Habit, and in it, one investor tells Duhigg that he immediately called his clients and told them to dump their Alcoa shares, worried that “The board put a crazy hippie in charge and he’s going to kill the company.”
This investor later remarks “It was literally the worst piece of advice I gave in my entire career.”
O’Neill’s relentless push for safety paid off handsomely. By the time O’Neill retired in 2000 (CEO from 1987 – 1999, retired as chairman in 2000), net income had quintupled and Alcoa’s market capitalization had increased by $27 billion.
O’Neill accomplished these impressive financial feats all while turning Alcoa into one of the safest companies in the country while Alcoa’s worker injury rate fell to one-twentieth the U.S. average. This reduction in injuries is even more impressive given that Alcoa employees work with molten metal and heavy equipment daily.
At a glance, it may seem confusing as to how a strong emphasis on safety can lead to such astonishing financial results, but after a bit of thinking the answer is quite straightforward. A safe work environment means fewer people missing work due to injury or incapacitation, less money being spent to pay for damages and injury-related compensation, and less productive time lost.
This all adds up and allows a company to operate as close to its maximum productivity as possible. Why? Because fewer resources are wasted on non-productive endeavours, such as dealing with work-related injuries.
A highly productive company is, for the most part, very likely to be in good financial shape, or at least increases its odds of achieving that. From an investor’s perspective, that is very good to see.
This may all sound anecdotal, but the U.S. National Safety Council published data regarding work injury costs in 2021. The findings reveal that the total cost of work injuries in 2021 totalled $167 billion, $47.4 billion of which was attributed to wage and productivity losses.
In addition, work-related injuries in 2021 resulted in 103,000,000 lost days, 70,000,000 of which were due to injuries sustained during the year, the remainder from prior years.
Imagine how much more productive countless companies would have been had they not lost so many days due to injuries, many of which could have been prevented.
With all of this in mind, it’s clear that there is a very strong business case to put safety top of mind. If this is the result of putting safety first, then what happens when safety is put on the back burner?
BP Macondo Deepwater Horizon Oil Spill: Lessons Learned from Tragedy
One of the most infamous oil spills in recent memory, if not history, is that of the Deepwater Horizon offshore oil platform in 2010 which was, at the time, being leased to British Petroleum (BP).
A full technical breakdown is well beyond the scope of this article, but this incident is known for being the largest marine oil spill in history.
Although this appears to be a one-off event, it was revealed by WikiLeaks that just two years prior BP suffered a similar incident (in terms of the point of failure) in Azerbaijan. In 2005, BP also made headlines for a major explosion that occurred at their Texas City refinery, killing 15 workers and injuring 180 others.
Clearly, safety isn’t exactly high on BP’s list of things to worry about. Unfortunately for them, this decision will prove to be a very fatal and costly one.
Going back to Deepwater Horizon, the financial hit to BP was, unsurprisingly, very hefty. Not only was the short-term financial hit very severe, but even many years after the incident claims related to the incident continued to come forward.
To pay for spill-related costs, BP sold nearly $20 billion worth of assets to raise funds. This was perhaps meant to fund the $20 billion compensation fund that BP set up for those affected by the spill, which U.S President Barack Obama demanded they create. By 2013, the fund had largely been depleted.
By 2011, BP had lost nearly a quarter of its market value and had shed nearly $40 billion in costs associated with cleanup and recovery. In 2018, BP revealed that the total costs related to the Deepwater Horizon incident had grown to $65 billion.
Nearly all of the recommendations from various third parties explicitly mention improving safety systems and procedures to ensure such a major loss incident wouldn’t happen again.
Imagine if those billions of dollars were spent on pursuing new projects, paying off debts, and being distributed as dividends instead of paying for damages related to a completely avoidable incident.
If Alcoa is a shining example of what happens to investment merit when safety is put front and centre, then BP serves to showcase the total opposite.
Safety Culture, or Lack Thereof, Takes Time to Be Noticed
As our previous examples have demonstrated, robust safety systems and a strong safety culture (or lack thereof) have a tangible effect on a company’s bottom line and investment merit, for better or for worse.
From a qualitative perspective, a strong safety record paired with superb financial performance reflects very positively on a company, which signals to investors that management knows how to run a profitable enterprise without jeopardizing the safety of its employees in the process.
Although putting a strong emphasis on safety cannot be stressed enough, the challenge faced by investors, and other stakeholders for that matter, is that the results of putting safety first (or last) take time to get noticed.
Alcoa’s net income and stock price grew drastically under O’Neill’s tenure, yes, but this was after 12 years of continuously improving, nurturing, and maintaining Alcoa’s commitment to safety. Investors had every right to be suspicious of his commitment to safety at the start of his tenure because there was no guarantee his words would lead to something tangible.
In the previous section we briefly touched on how before the infamous Deepwater Horizon incident, BP suffered another major incident just 5 years prior. While these two events appear to be unrelated, they are very much interconnected. Several investigations conducted throughout the 2000s found that the 2005 and 2010 loss incidents were bound to happen given BP’s atrocious culture of disregard for safety and environmental rules.
Years of cutting corners, ignoring safety warnings from reports, and discouraging workers from reporting safety concerns eventually resulted in fatalities, injuries, serious environmental damage, and a huge hit to BP’s finances.
It’s very easy to make grandiose commitments about putting safety first, but only time will tell if those words have any weight behind them or not. From an investor’s point of view, such commitments are nice to see, but they need to remember that the results are what matter because they are what will ultimately affect investment merit.
Safety Isn’t Limited Just to Physical Harm
So far, our discussion of safety has focused solely on the physical domain. Companies with physical assets and business activities naturally have to consider how potential incidents could impact the people and environment around them.
But what about companies that don’t have much of a physical business model, if at all? Banks, insurance companies, and software companies fall under this category, so does that mean they don’t need to worry about safety?
Given that we live in the digital age, there now exist unique methods that can compromise safety even if no physical harm is done. A very prominent example of this is cybercrime.
Estimates suggest that, by 2025, cybercrime will cost companies worldwide an eye-watering $10.5 trillion, up from $3 trillion in 2015.
Cybercrime is so serious because it includes the destruction of data, stolen money, lost productivity, and theft of intellectual property, among many other things. Although nobody is physically hurt because of these things, there are still significant losses in the form of lost money, productivity, and years’ worth of work.
Additionally, the customers of these companies can become targets as well, putting countless people at risk by potentially having their funds compromised or having their personal information end up in unwanted hands.
So, even if certain safety risks don’t have any physical effects they still have the potential to cause some very serious harm. If a given company doesn’t take cyber safety, among other non-physical, risks seriously, then investors have a very good reason to be wary and start looking elsewhere.
Considering Safety when Evaluating Investment Merit
Although safety is usually brushed off as something that isn’t worth much time and energy, what we’ve covered in the preceding sections has made it abundantly clear that there is a very strong business case for putting safety top of mind.
We’ve repeatedly mentioned how safety can influence investment merit, so it’s only natural to ask how exactly safety can be considered when trying to assess investment merit.
It’s important to remember that most investors don’t have the power to directly influence day-to-day business operations, so the next best thing they can do is understand what a given company’s attitude towards safety is, and if they say they take it seriously figure out how they demonstrate it.
Fortunately, there are a few ways investors can go about doing this. Let’s look at some of them.
1.) Check if Safety is Classified as a Priority or a Value
One of the first ways to determine how a company feels about safety is to find out if they categorize it as a priority or a value. This can either be explicitly mentioned, such as in an annual report, or can be found somewhere on a company’s public relations/about us web page.
Now, this may appear to be just a matter of semantics, but there is a difference between the two.
A priority is something that is assigned its importance relative to other tasks/variables. On a given day, you most likely have several tasks that need to be completed. To make effective use of your time, you prioritize your tasks such that you complete what you feel is the most important work first, then get around to doing less important work later.
As you may already know from your experiences, priorities can change. Tasks that were once labelled as “very important” can lose their importance, and the opposite can also happen to things further down the list.
Herein lies the problem with calling safety a priority: just because it’s classified as such doesn’t mean it’s high on the list. Of course, companies can claim that safety is their “top priority”, but who’s to say that their priorities won’t change?
Values, on the other hand, are attributes that are ingrained in a company’s psyche and influence how to carry out their business by setting the tone for everyone in the organization from the top down. Values seldom change, and if they do, fundamentally affect how a company operates.
Think about the values you abide by, and how they influence nearly everything that you do. Now, if you were told to change them on a whim, would you? Probably not because they most likely define who you are as a person and how you choose to live your life, and changing something that fundamental isn’t something most people do at the drop of a dime.
The same happens when a company makes safety one of its values. Assuming a company seriously enforces its values, it’s less likely for it to neglect the importance of safety in its operations because it defines who they are.
2.) How Forthcoming Is Management About Incidents?
No matter how robust a company’s safety procedures are or how strong its safety culture is, there will still be incidents from time to time.
Now, this doesn’t mean the effort put towards safety is a waste. Rather, no company is perfect, and even the safest enterprises in the world have holes in their safety protocols and procedures. Sometimes, all the wrong variables line up, and disaster strikes. Therefore, it’s not a matter of if, but when an incident will occur.
When these incidents do happen, does management openly admit that they took place, or do they try to hide them under the rug and hope they’re forgotten about?
If a company truly does value safety, then it won’t be afraid to come clean when an incident happens and will have the humility to admit that there’s always room for improvement. This sends a clear message to investors that no important developments and other bits of information are being kept from them.
On the other hand, companies that choose to hide any incidents for the sake of keeping face may exacerbate underlying problems, until one day those problems culminate into an incident that is too big and catastrophic to be kept secret.
3.) What Actions Are Being Taken to Ensure Safety Is Being Practiced and Enforced?
As you may already know, actions speak louder than words, and that is no different when it comes to safety.
Any company can say they value safety, and they can also say that they’re going to improve their safety standards after an incident has occurred, but words are cheap. What exactly is being done to ensure safety is being practiced and enforced?
This information can certainly be found, sometimes very easily, and other times after a bit of digging.
Some companies publish annual safety reports that detail what exactly they do to ensure safety is practiced and highlight certain safety milestones they achieved over the past year. Some may report how much money they’ve spent on certain safety initiatives and related projects. Others may give an overview of how they achieve safety on their website.
Regardless of how this information is conveyed, what matters is that investors see that words are being put into action, and commitments about being safe aren’t made solely for the sake of paying lip service.
4.) What Does the Company’s Safety Record Look Like?
One of the clearest ways to determine whether a company is serious about safety or not is to look at its safety record. Companies can make as many safety commitments as they want, but the most impartial way to assess their performance is to see what their track record is in terms of the number and severity of historical incidents.
Now, this may seem like a very obvious thing for investors to check, but the problem is very few, if any companies maintain such a document, at least one that’s publicly available. Some companies may talk about incidents in a press release or their annual reports, but a comprehensive list is unlikely.
This may sound nefarious, but from a business perspective makes perfect sense. By publicly sharing a detailed list of all its past incidents both big and small, a company opens itself up to unwanted scrutiny from investors, stakeholders, regulators, and even its competitors. Although the intention may be good, it could bring about unintended consequences.
This means that investors are largely responsible for uncovering these incidents themselves. Fortunately, many of these incidents can be found through a simple internet search.
Now, investors don’t need to know about every single incident that has ever taken place. However, if they notice that a company has repeatedly been featured in headlines because of major incidents, then a deeper look into its safety practices is warranted.
Wrapping Up
Safety is often viewed as a relatively minor concern, and when it comes to a business’ operations, is usually placed far down the list of things that deserve time and attention. By extension, investors usually don’t concern themselves that much about safety either.
However, there is a very strong business case for putting safety top of mind. A safe company means fewer injuries, fewer lost days, and less money being wasted on paying fines/penalties. This means a company can better focus its time and resources on operating as close to its maximum productivity as possible, maximizing investor value in the process.
Fortunately, considering safety while assessing potential investments isn’t an overly complicated affair. A few relatively simple methods can help investors determine if a company is serious about putting safety first or not.
