Summary Statement
A white paper by the American Society of Safety Engineers presents the case that Health and Safety expenditures offer a good return on investment.
2002
WHITE PAPER ADDRESSING
THE RETURN ON
INVESTMENT FOR SAFETY, HEALTH, AND ENVIRONMENTAL (SH&E) MANAGEMENT
PROGRAMS
NOTICE: This report, white paper, and set of recommendations were produced
by the ASSE Council on Practices and Standards (CoPS) of the American
Society of Safety Engineers (ASSE). CoPS is a council of ASSE, which
provides technical insight to ASSE leadership addressing the practice
of the safety profession, its specific disciplines, and the standards
of practice impacting our members.
The ASSE Council on Practices and Standards is structured to provide balanced and sound assessment of matters related to the effectiveness and efficiency of the standards of practice in the safety profession. The Council consulted with many organizations, entities, and governmental agencies while developing this report and white paper, however, it has not been reviewed for approval by any other entity than ASSE. The contents of this report, and its recommendations, do not represent the views of any other organization other than ASSE. The mention of trade names, companies, or commercial products does not constitute any recommendation or endorsement for use.
The information
and materials contained in this publication have been developed from
sources believed to be reliable. However, the American Society of Safety
Engineers (ASSE) accepts no legal responsibility for the correctness
or completeness of this material or its application to specific factual
situations. By publication of this paper, ASSE does not ensure that
adherence to these recommendations will protect the safety or health
of any persons, or preserve property.
Approved by the ASSE Board of Directors
June 8, 2002
SUMMARY ADDRESSING THE RETURN ON INVESTMENT (ROI) FOR SAFETY, HEALTH, AND ENVIRONMENTAL (SH&E) MANAGEMENT PROGRAMS
The implementation, maintenance, and improvement of SH&E programs are of significant importance to this country as the economy of the United States moves toward more of a global perspective. Such programs positively impact all Americans and specifically those who work at all levels of the public and private sectors in technology development, manufacturing, training, financial analysis, personnel, academia as well as the final end user. An effective SH&E Program not only benefits and protects the organizations implementing such a program, but also furthers the interests of the United States in a globally competitive environment.
The American Society
of Safety Engineers (ASSE) knows from data and anecdotal information
that investment in a SH&E program is a sound business strategy,
for any organization regardless of size, and will lead to having a positive
impact on the financial bottom line. ASSE calls on governmental agencies
such as Occupational Safety and Health Administration (OSHA), Mine Safety
and Health Administration (MSHA), Environmental Protection Agency (EPA),
Consumer Product Safety Commission (CPSC), and the National Highway
Traffic Safety Administration (NHTSA), etc…, to do more in regard
to showing that SH&E management is more than simple compliance.
The private and public sector should be encouraged to work together
to show American business and industry that SH&E is not only required
under the law, but should become and remain a core business strategy.
RETURN ON INVESTMENT (ROI) FOR SAFETY, HEALTH, AND ENVIRONMENTAL
(SH&E) MANAGEMENT PROGRAMS
Introduction
The key question asked of many SH&E Professionals by financial planners
in business and industry is: Do safety and health management programs
improve a company's bottom line? The answer is a resounding "YES",
although benefits may be somewhat hard to quantify. But in addition
to outright savings on worker's compensation benefit claims, civil liability
damages,1and litigation expenses, having a solid safety and
health management program with senior management commitment will improve
productivity and employee morale. It can also make the difference between
winning and losing bids and even government contracts.
ASSE has taken the position that the days are over when companies can view safety and health violations as the status quo, and regard SH&E violations and the attendant civil penalties as another "cost of doing business." For one thing, penalties have been increasing in dollar amount. In addition, knowing violations that result in the death or serious injury of a worker may be prosecuted at the state level under criminal laws, or in a referral by a government agency to the U.S. Department of Justice.
The Hidden Costs
of Failed Safety and Health Systems
Anyone who has had the misfortune of witnessing or handling the aftermath
of a serious or fatal on-the-job injury knows that, without question,
the costs go far beyond those that appear in a company's ledger book.
For those who survive, or who work with the accident or illness victim,
the costs continue with psychological stress that may require years
of counseling. Many times, coworkers who witness a serious event find
themselves unable to return to the worksite for a significant period
of time, which presents additional costs to the company through the
abrupt loss of skilled workers. A plant with a singularly bad reputation
for safety and health may find itself unable to attract workers at all
or may have to pay wages well above market value to do so. These are
just a few of the "hidden" costs of a poor safety and health
program.
Moreover, as more information concerning a company's compliance and injury/illness experience becomes publicly available over the Internet and from the federal agencies through Freedom of Information Act (FOIA) requests, foes of industrial growth may use this data to defeat permit applications or zoning change requests. Part of being a "good corporate citizen" - rather than a company that no one wants in their backyard - is offering a safe and healthful work environment to the local residents.
Companies may also "externalize" costs associated with workplace injuries or illnesses, to the detriment of their safety and health program management. If some other organization (such as worker's compensation, social security, welfare or other insurance) pays the costs, corporate management may have a disincentive to control hazards. ASSE believes here is an excellent example of being "penny wise and pound foolish."
When insurance pays for the immediate costs of employee injuries, ultimately we will all pay either in the form of higher premiums, inability to obtain insurance completely, or passed-through costs to the consumer. Conversely, when there are fewer accidents, society saves as a whole. Fewer hospitals, medical professionals and rehabilitation facilities will be needed, and employee productive capacity will not be reduced as a result of occupational injury, disease, and death.
The current Secretary of the Treasury, Paul O'Neill, who also served as the longtime chairman of Alcoa Steel Corporation, has taken the position that investment in safety, health, and the environment is good for the economy, country, the firm, and its workers. Part of his company's (Alcoa) key business strategy included emphasis on occupational safety, health, and environmental management. His belief is that investment in SH&E makes sounds business sense and should be a cornerstone of an organization's goals and objectives. During his nomination, appointment, and confirmation as Secretary of the Treasury, Mr. O'Neill consistently spoke in favor of ongoing investment in SH&E as positive generator for organizations.2
Some statistics
and examples to consider when reviewing the "Economics of Safety":3
- Nearly 50 workers
are injured every minute of the work week
- 17 workers
die on-the-job each day
- Workplace injuries
will cost society $128 billion in losses this year, which equals one-quarter
of each dollar of pretax corporate profits
- Indirect costs
of injuries may be 20 times the direct costs -- Indirect costs include:
training and compensating replacement workers; repairing damaged property;
accident investigation and implementation of corrective action; scheduling
delays and lost productivity; administrative expense; low employee
morale and increased absenteeism; poor customer and community relations
- To cover the
cost of a $500 accident, an employer would have to:
- bottle and
sell 61,000 cans of soda
- bake and
sell 235,000 donuts
- deliver 20 truckloads of concrete
- bottle and
sell 61,000 cans of soda
In recent years, encouraging senior management commitment to safety and health program management has become a priority for federal and state agencies involved with safety regulation and enforcement. A survey of employers indicates that the Top Ten motivations for taking actions were:
1. Cost of workers'
compensation insurance (59 percent);
2. "Right thing to do" (51 percent);
3. "Increases Profitability" (33 percent);
4. Federal/State safety rules (31 percent);
5. "Too many accidents" (29 percent);
6. Employee morale (26 percent);
7. Productivity (23 percent);
8. OSHA fines (20 percent);
9. Employee concerns (5 percent); and
10. Recommendations of outside experts (13 percent).4
Examples of Savings Attributable To SH&E programs.5
- A SH&E
Director for an environmental services company in Massachusetts reported
that its tracking data indicated $8 saved for each dollar spent on
a quality SH&E program.
- A coal mining
company in Charleston West Virginia has attained a competitive advantage
through investment in SH&E programs. The company claims its worker
compensation rate is $1.28 per $100 in payroll as opposed to its competitor's
rate of $13.78.
- Fall protection
program implementation reduced one employer's accident costs by 96
percent - from $4.25 to $ 0.18 per person-hour
- Implementation
of an OSHA consultation program reduced losses at a forklift manufacturing
operation from $70,000 to $7,000 per year
- Participation
in OSHA's Voluntary Protection Program has saved one company $930,000
per year and the company had 450 fewer lost-time injuries than its
industry average
- A SHARP (Safety
& Health Assessment & Research for Prevention Program) participant
reduced its lost workday incidence rate from 28.5 to 8.3 and reduced
insurance claims from $50,000 to $4,000 through decreases in both
direct and indirect losses through a reduction its number of back
and shoulder injuries.
- Implementation
of an improved safety and health program reduced Servicemaster's worker's
compensation costs by $2.4 million over a two-year period
- A manufacturer
using a state consultation program reduced its worker's compensation
modification rate from 1.7 to .999, and saved $61,000 on its worker's
compensation insurance premiums\OSHA VPP sites saved $130 million
in direct and indirect injury/illness costs in 1999.
- OSHA's Office
of Regulatory Analysis has stated: …our evidence suggests
that companies that implement effective safety and health cans expect
reductions of 20% or greater in their injury and illness rates and
a return of $4 to $6 for every $1 invested...
- In their 9/2001 article titled: Measuring Safety's Return on Investment, Susan Jervis and Terry R. Collins, make the argument that there is a direct correlation between a company's performance in safety and its subsequent performance in productivity and financial results. They pointed out that in the Forbes 1999 Financial Rankings, among those listed ten of the most-successful U.S. businesses were participants in the OSHA VPP program.6
On August 29,
2001, Liberty Mutual Insurance Company released a report titled:
A Majority of U.S. Businesses Report Workplace Safety Delivers
a Return on Investment. The Liberty Mutual survey shows 61 percent
of executives say $3 or more is saved for each $1 invested in workplace
safety.
Federal Programs
The original OSHA effort to encourage use of safety and health management
programs was the Voluntary Protection Program (VPP) initiative, established
in 1982, was restructured in 1996 and is still in effect. The VPP emphasizes
the importance of worksite safety and health programs in meeting the
goals of the OSH Act, and provides official recognition of excellent
safety and health programs, assistance to employers in their efforts,
and the benefits of a cooperative approach among labor, management,
and government to resolve potential safety and health problems. Recognition
in the VPP requires rigorous attention to workplace safety by all personnel.
Sites are approved based on their written safety and health program
and their overall performance in meeting the standards set by the program.
The VPP is comprised of program elements that have been demonstrated to reduce the incidence and severity of workplace injuries and illnesses.
- The "STAR"
program is the most highly selective program and is for applicants
with occupational safety and health programs that are comprehensive
and successful in reducing workplace hazards. Lost workday rates are
53 percent below national averages.
- The "Merit"
level is for companies with good programs that are looking to improve
and proceed to the STAR level. Lost workday rates are 35 percent below
national averages.
- The "Demonstration"
level is designed for contractors who meet the requirements as STAR-level
companies but are not otherwise eligible for the STAR or Merit designations.
VPP participation is strictly voluntary and OSHA keeps application information confidential. Participating employers must still comply with OSHA standards, but they are exempt from programmed OSHA inspections (although not from those prompted by employee complaints or triggered by fatalities, catastrophes or significant leaks and spills). OSHA claims the following ROI for companies participating in VPP:7
- Injury Incidence
Rates: In 1994, of the 178 companies in the program, 9 sites had no
injuries at all. Overall, the sites had only 45% of the injuries expected,
or were 55% below the expected average for similar industries.
- Lost Workday
Injury Rates: In 1994, of the 178 companies in the program, 31 had
no lost workday injuries. Overall, the sites had only 49% of the lost
workdays expected, or were 51% below the expected average for similar
industries.
- While protecting
workers from occupational safety and health hazards, companies following
the management guidelines mandated for VPP membership also experience
decreased costs in workmen's compensation and lost worktime, and often
experience increased production and improved employee morale.
- The lost workday
case rate at Thrall Car Manufacturing Company in Winder, Georgia decreased
from 17.9 in 1989 when the facility began implementing a VPP quality
safety and health program to 4.6 in 1992 when the plant was ready
to qualify for the Star Program. In 1994 the rate was 0.6. From 1989
when Thrall Car's Winder, Georgia plant began implementing its programs
to qualify for the VPP and 1992, workers' compensation costs dramatically
declined by 85%, from $1,376,000 to $204,000.
- At Monsanto
Chemical Company's Pensacola, Florida Plant, which employs 1600 workers,
the Lost Workday Case Rates have steadily declined during the period
the worksite was implementing effective safety and health programs
and in the four years since approval to the VPP. The rates fell from
2.7 in 1986 to 0.1 in 1994.
- Mobil Chemical
Company has brought all of existing plants (plastics production and
chemical plants) into VPP. OSHA reported that the company's recordable
injuries were reduced 32%, lost workday cases were reduced 39%, and
the severity of cases was reduced by 24%. Also, the company reduced
its workers' compensation costs by 70 per cent, or more than $1.6
million, from 1983 to 1986, during the years it was qualifying its
plants for the VPP. This reduction has been sustained through 1993.
Mobil Oil Company's Joliet, Illinois refinery experienced a drop of
89 percent in its workers' compensation costs between 1987 and 1993.
- Occidental Chemical
Company determined that as their Safety Process Systems Implementation
percentage increased company-wide their Injury/ Illness rate decreased
from 6.84 in 1987 to 1.84 in 1993, a 73 % decline.
- In the construction
industry, Georgia Power Company brought two large power plant construction
sites into the VPP in 1983 and 1984. By 1986, one site had reduced
its total recordables by 24 per cent and its lost workday cases by
a third. The other site reduced recordables by 56 per cent and its
lost workday cases by 62 per cent. At Georgia Power's two power plant
construction sites, the direct cost savings from accidents prevented
at one site was $4.14 million and was $.5 million at the other for
1986 alone.
- During three
years in the VPP, the Ford New Holland Plant noted a 13 per cent increase
in productivity and a 16 per cent decrease in scrapped product that
had to be reworked.
- During a recent evaluation of the Kerr-McGee Chemical Corporation Mobile, Alabama plant in July 1991, the VPP team found that at the same time, work related injuries continued to decline, production hit an all time high that exceeded the goal by 35 percent.
OSHA E-Cat Initiatives
OSHA recently unveiled its "e-CAT" initiative, which pushes
implementation of a safety culture at every level of an organization.
The multi-faceted program has four components: (1) Management System
and Safety/Health Integration; (2) Safety and Health Checkups; (3) Creating
Change; and (4) Safety and Health Payoffs.
OSHA's e-CAT program consists of electronic Compliance Assistance Tools ("CATs") that provide guidance information for employers to develop a comprehensive safety and health program. Such programs are required by some states, although there is currently no such federal OSHA requirement.
OSHA's safety and health program management rule is under development, and its future will depend on the regulatory priorities of any Administration. The draft rule, released in October 1998, would have covered all general industry employers and applied to hazards covered by the General Duty Clause and existing OSHA standards. The proposal set forth the following core elements:
- Management leadership
and employee participation (hold managers accountable for carrying
out safety and health responsibilities in the workplace and provide
them with the authority to do so; and, provide employees with the
opportunity to participate in establishing, implementing and evaluating
the program);
- Hazard identification
and assessment (conduct worksite inspections, review safety and health
information, evaluate new equipment, materials and processes before
they are introduced to the workplace, and assess the severity of hazards);
- Information
and training (provide employees with information and training in the
safety and health program with respect to the nature of hazards, what
is done to control the hazards, and the provisions of applicable standards);
and
- Evaluation of program effectiveness (at least once every two years, after the initial program development).
Finally, OSHA has the "SHARP" program (Safety and Health Achievement Recognition Program), which provides incentives and support to develop, implement and improve effective safety and health programs. Participating employers may be exempted from OSHA programmed inspections for a period of one year. All consultation and visits are conducted at employer request. Typical participants are smaller high-hazard businesses (e.g., with fewer than 250 employees) that do not have serious safety and health problems. Participants undergo a comprehensive site visit and agree to correct all identified safety and health hazards.
Even where not mandated by law, SH&E management programs are critical to the safety, health, and environmental performance of an industrial employer. Companies that are truly committed to excellence should consider participation in the VPP or the other consultation and professional development programs offered by OSHA or through professional safety organizations such as ASSE.
State Programs
At the state level, Oklahoma last year was lauded for its "Safety
Pays" program, which offers employers assistance in developing
management programs that identify and eliminate workplace hazards and
ensure compliance with OSHA regulations. Nine employers were among those
receiving the state's Awards of Excellence" and it was noted that
the employers had zero lost-time accidents while reducing worker's compensation
insurance costs from 47 to 97 percent.
Similar savings were noted in Alberta, Canada, where the Worker's Compensation Board announced last year that over $2 million in premium refunds would be distributed to more than 400 employers who registered in the "Partners in Injury Reduction" (PIR) program. Other PIR program benefits included lower worker's comp premiums, increased worker productivity and minimized accident costs. The average lost-time claim rate at PIR participant worksites dropped more than 20 percent.
Private Sector
Initiatives
At the private sector level, the American Textile Manufacturers Institute
(ATMI) instituted the "Quest for the Best in Safety and Health"
program in 1993 to help its members identify strategies for continuous
improvements in safety and health. Approximately 50 companies participated
and had impressive results. At one company, Springs Industries, 45 percent
of its plants worked 1 million manhours or more without a single lost-time
accident - and some exceeded 10 million manhours. What was the secret
of their success? The following elements were responsible for a 25 percent
decrease in overall injuries in the program's first year:
- Guaranteeing
management commitment,
- Publicizing
the company's commitment to safety throughout the community,
- Including discussions
of safety issues during employee interviews,
- Offering employee
wellness programs (healthier employees are less likely to be injured
on the job),
- Training employees
thoroughly, with new hire orientation and use of Job Safety Analysis
(a blueprint for carrying out each step of a job safely),
- Conducting accident
investigations and creating a case management program, and
- Implementing an effective SH&E program that involves total commitment from employees and management based on a "team" approach.
It has become generally accepted and understood that there is a significant and growing correlation between industrial companies' investment in their environmental programs and their overall competitiveness and financial performance. For example, Innovest Strategic Value Advisors has consistently reported that some researchers claim that the "sustainability premium" can regularly exceed 200 basis points annually for broadly diversified portfolios. There have even been instances where it can surpass 500 in sectors with a particularly acute risk exposure.8
Innovest Strategic
Value Advisors, in an annual investment research report on the Global
Auto Parts market, reported that its results indicated that firms investing
in environmental management posted accumulated returns over 48.8% higher
than environmental laggards over a 3-year period, and 6% higher returns
over 1-year. The report further indicated that Denso Corporation and
Snap-On Tools emerged as the top ranked companies in this annual survey,
which assessed the performance of 18 of the world's leading automotive
parts and supply companies in areas such as environmental management,
resource usage, climate change, product life cycle analysis and sustainability-related
profit opportunities in new markets.9
In addition, a subsequent study of the electric utility industry, found
that portfolio managers who screen out companies with poor environmental
records can outperform others by more than 7% annually. Finally, a news
report shows that the top environmental performers in the computer sector
have outperformed their industry rivals financially by 25% since the
beginning of 1998. The report, The Computer Industry -- Hidden Risks
and Value Potential for Strategic Investors, calls into question the
view of the environment as a cost center and presents evidence linking
superior environmental performance with competitiveness and profitability.
Citing Dell Computer Corp. as one example, the report says the company's
energy-efficiency initiatives already have generated cost savings of
37%.10
Value of Company/Organizational Reputation 11
It has long been recognized that a Company's reputation is of significant
value in generating a favorable ROI. For example, a company or organization
will benefit from a favorable reputation by becoming the first choice
of customers, investors, suppliers, and employees. A favorable reputation
with customers creates a degree of brand equity with them that enhances
loyalty, encourages repeat sales, and grows revenues. Similarly, a favorable
reputation with employees can help attract better employees, spur productivity,
and enhance profitability. Comparing book values with market valuations
suggests that the intangible assets of public companies in the US and
the UK constitute on average some 55 per cent of their market valuations
- a proportion that has grown steadily over the past 40 years. These
intangibles are made up of intellectual capital such as patents and
reputational capital (the strength of the company's stakeholder relationships).
Conclusion
Workplace injuries and illnesses are costly in financial and human terms.
More than $40 billion are paid each year by employers and their insurers
in worker's compensation benefits, or nearly $500 per covered employee.
This figure is simply unacceptable. The data and citations referenced
throughout this paper support the ASSE finding that there is a direct
positive correlation between investment in SH&E and its subsequent
ROI. Ultimately, company executives must recognize that they have a
duty to provide a safe and healthful workplace to those who work for
the company or visit the worksite. It is unethical to risk someone's
life and health in order to save money. A sound safety and health management
program can help companies fulfill their moral obligation.
Related ASSE
Position Papers
The Role of the Safety Professional and Management
The Role of Government in Occupational Safety and Health
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