The Secret to Increasing Equity Value… And It’s Not What You Think!

A company’s equity performance is impacted by a number of key factors, including production efficiency and quality, margins and profitability and market position.

The best CEOs analyze these areas for risks that can negatively impact their equity and promote value enhancing initiatives to produce outsized shareholder returns.

Investments made by executives to reduce corporate risk can take many forms.  For example:

• New equipment to reduce the risk of poor quality or inefficient production
• Engineering can reduce operational waste and increase margins, and
• Marketing and branding can reduce the risk of low demand for products or services.

However, another risk exists that has an often unrecognized significant and profound influence on all factors affecting equity value: the risk of workers being injured on the job.

According to a report by McGraw Hill Construction, investments in workplace safety are proven to increase production quality, improve margins and profitability and significantly improve a company’s public image leading to new business.  So if concrete evidence proves that investments in worker safety will increase equity value, why aren’t more CEOs doing so?

Challenges Executives Face When Investing and Implementing Safety Initiatives

The first obstacle is that most companies are not currently set up to change culture, incentives and processes to accommodate the increased investment in worker safety. Furthermore, most companies are not set up with the proper processes for determining the ROI of their safety initiatives. With that in mind, while most CFOs don’t even calculate the ROI of their safety initiatives, 60% of the ones who do, report greater than a 100% return on investment. So why aren’t more CFOs doing this? Because of the misperception that safety initiatives only have social benefits, not monetary ones.

For instance, let’s say two projects are competing for capital where the first promises improved margins and cash flow while the second promises improved safety culture and employee satisfaction.  More often than not, CEOs will lean towards improvements in cash flow, not because employee safety is less important, but because metrics for success and failure can be directly applied to income statement benefits while it’s more difficult to determine the monetary success for investments in safety culture and worker satisfaction.

Nevertheless, executives who find themselves choosing to invest in operational improvements instead of safety will benefit from the increasingly available evidence that safety actually improves productivity. It therefore stands to reason that by investing in safety, executives are also investing in operational improvements.  Plus, unlike many operational initiatives, testing this thesis is both inexpensive and lucrative.  The benefits, however, are largely not well researched so to reduce their risk exposure, executives need to spend time or delegate the task of properly understanding the benefits (return) that they’ll receive by investing in safety.

Benefits of Investing in Safety

While many companies still find themselves under-investing in safety initiatives, there is a rapidly growing subset of companies that are making proactive investments.

Many benefits of investing in safety are outlined in a study conducted by the Aberdeen Group.  Aberdeen segmented participants into three categories, 1) Best-in-Class, 2) Industry Average, and 3) Laggards based on their performance in various safety metrics including safety culture.  The report found that Best-in-Class companies were nearly 50% more likely to have executive level commitment and investment in their safety initiatives.

That executive commitment is undoubtedly a result of the tangible benefits received in addition to incident rate reductions, decreased project budgets, increased project ROI and improved reputation.