They may not admit it, but many companies make safety dependent on cost-benefit analysis. Their difficulty is that the worth of a human life is incalculable – as is the cost for companies that look callous.
When Michael Hodder drove his Thames Train through a difficult-to-see red light outside Paddington station, he made what could prove to be one of the most costly errors ever in British industry. After the initial horror of the accident, in which 31 people died, had abated, there was an outcry about the safety standards of rail companies which soon spread to engulf much of the business world.
After a string of fatal disasters, from the sinking of the Herald of Free Enterprise to various rail crashes, in which company directors were perceived to walk away scot free, the public was not in the mood to listen to excuses. The country wanted action, and the focus-group driven Labour government, which prides itself on reflecting public opinion, had to look tough.
So John Prescott’s announcement that he’s planning legislation that would introduce a law of ‘corporate killing’ has to be taken seriously. Under the proposed law, a company would be obliged to appoint a safety director who would carry the can – and serve any prison sentence – if his organisation caused death through negligence.
Predictably, the proposal has provoked rage from business. Ruth Lea, head of policy at the Institute of Directors, says: ‘Why should the safety director be prosecuted if some idiot leaves something lying around and people injure themselves? And why should a single director bear the responsibility for the whole organisation?’
But there is a sense that, this time, the public is not listening, and that the government will boost its voter appeal by being seen to be tough – even if that means some of Labour’s business supporters will quit Blair’s ‘big tent’.
However, not all business voices are averse to tougher safety laws and there is now a wider recognition that business might not have given safety as much attention as it deserves. A survey last year by Butterworths Tolley found that around a third of safety managers believe health and safety was rarely or never a priority for their senior executives.
Critics are keen to ram home the point that safety needs to be higher up the corporate agenda. David Bergman, director of the Centre for Corporate Accountability, says: ‘Large companies spend an enormous amount of time and attention on showing that their financial management systems are absolutely watertight. If they are going to do that with money, then they need to do it with the safety of the people they employ and those who are affected by their activities.’
Roger Bibbings, occupational safety adviser at the Royal Society for the Prevention of Accidents, says not enough companies learn from accidents. ‘Most companies don’t investigate accidents at all. They are failing to use the accident as a learning opportunity to find out not only why something went wrong, but why it wasn’t prevented in the first place.’
And Maurice de Rohan, chairman of Disaster Action, an organisation set up by the families of victims of corporate deaths to campaign for a change in the law, says board directors need to take a more personal interest in safety. ‘They can’t just say they have made a policy statement and that is it. They have got to follow through to make sure that it functions and that they get regular reports back at board level.’
In fact, boards have already been prepared for significant legal changes in their safety duties by the Turnbull report, which appeared in September last year. Although the report only proposed changes for LSE-listed companies, its conclusions are certainly relevant for others. It said that companies should draw up a formal risk management policy backed by internal controls by Christmas this year. Moreover, it suggested that the best person to take responsibility for this at board level was the FD.
Turnbull said the FD should conduct an annual risk review and inform shareholders that it’s been carried out. FDs should review the need for an internal risk audit function, set policies and put controls in place based on the company’s risk profile, and receive regular reports from senior safety management. Lest any FD should think this does not have much to do with the financial performance of the company, Turnbull makes it clear that these issues potentially have a big impact on corporate reputation, image and shareholder expectations.
Of course, instituting a more effective risk management policy costs money. And raising the question of money when lives – or at any rate, health and safety implications – are at stake takes the debate into difficult areas. In recent years, business critics have been quick to argue that lives could have been saved if companies had spent more on safety precautions. Bluntly, the argument is that some companies have put money before lives.
That point has surfaced most recently over the question of rail safety. After the Clapham rail disaster, train operators reviewed the possibility of introducing the automatic train protection (ATP) safety system which, some rail commentators claimed, would have prevented the accident. Since Paddington, they have faced more criticism for not installing the system. It has been reported that the quoted cost of £14m to save an ‘equivalent life’ (where ten serious injuries are equivalent to a death) made the system too expensive.
We are unlikely to know whether rail operators ever specifically made a cold-blooded calculation about their investment priorities in this way. Although many companies which have significant safety risks make calculations about the cost of life-saving or injury-reducing initiatives, few admit it.
The watershed was the Ford-Pinto case in the US in 1979, which shocked companies on both sides of the Atlantic. During the case, it emerged that even though Ford was aware that fires were being caused in some of its cars in low-speed collisions, managers had made an exact calculation of how much it would cost to rectify the fault compared with the damages it would pay to families of those killed in the accidents. After that, the legal and public relations dangers of placing monetary value on life were clear – and everybody opted to keep quiet.
Today, there are mounting financial consequences from the deaths of employees, customers or any unfortunate who just happens to be in the wrong place at the wrong time. In the past couple of years, courts and regulatory authorities have been tougher with companies that breach the law.
Two years ago, the Health and Safety Executive and Crown Prosecution Service agreed a protocol for dealing with workplace deaths of employees. When there is a death, the police investigate as a matter of course – alongside HSE officials; but the police are primarily responsible for investigating any possible manslaughter.
Courts now have unlimited powers to impose fines for breaches of health and safety legislation. And they have started to use them, taking a tougher line with companies. Fines handed out so far have included £200,000 to a construction company for the death of a road worker during motorway maintenance; £425,000 to a supermarket for an employee killed at a distribution depot; and £1.2m to Balfour Beatty when a rail tunnel collapsed during construction at Heathrow Airport.
But if the criminal law is taking a harsher view, the civil law still treats deaths of employees with comparative financial insouciance. The conventional award for death at work – where employer liability is proved – is currently around £7,500. This compares with £175,000 for an injury that causes major paralysis. David Marshall, a solicitor specialising in personal injury claims, who is an officer of the Association of Personal Injury Lawyers, says: ‘I don’t think that it should be cheaper to kill than to maim.’
But although criminal and civil penalties can’t be ignored, the biggest financial penalty for a company caught being negligent towards its employees or customers is likely to be the impact on business, which makes for a direct link between safety and profitability.
Michael Regester, a consultant who advises companies on risk issues and crisis management, says that in the most extreme cases there is a causal link between safety and corporate survival. Even in less dramatic circumstances, a company can face a profits slump. Regester says there are four consequences from a major risk management failure.
The first is a customer boycott of the product or service. The second, a possible consequence of the first, is bankruptcy. It was because people wouldn’t fly Pan Am’s last profitable route after Lockerbie that the airline was finally pushed into bankruptcy.
‘It wasn’t so much that the aircraft had crashed,’ says Regester. ‘It was the lack of concern it showed for families of the bereaved. The airline thought it would disassociate itself from the crash by keeping a low profile – but there were chunks of jumbo jet with Pan Am on the side lying all over Scotland. Passengers lost confidence in the airline and the boycott proved to be the final nail in the airline’s financial coffin.’
The third consequence of a failure of risk management is extra regulation or legislation. The important point here is that a whole industry can suffer for the failings of one company. Indeed, it’s arguable that UK businesses would not be facing corporate killing legislation if it wasn’t for the Paddington rail disaster.
The fourth area of potential damage is a company’s share price. ‘When there’s a preventable disaster, institutional investors tend to question the calibre of management and the direction they’re taking the company in,’ says Regester. Such falls can also leave a company vulnerable to takeover.
It is self-evident that it is better to manage risk so that these kinds of crisis don’t happen. But Regester has some good advice for companies that are caught out. ‘In your messages, there has to be a balance between the interests of the public at large and the focus of the investor. Because if, in the end, it does all go pear-shaped, the investors are going to depart in droves anyway.’
He adds: ‘I think that increasingly there will be a lot more shareholder support for money invested in activities which will protect the reputation of the company in the event of the worst happening.’
Robert Beckett, of the Institute of Social and Ethical AccountAbility, agrees that risk management reporting needs to move up corporate agendas. Last year, AccountAbility launched a standard for social and ethical accounting – AA1000 – which Beckett says could be used to help companies assess their broader risk agendas as well as other issues.
He says that more companies should seek to develop a culture in which risks are anticipated and dealt with throughout the organisation. ‘It’s much more effective to have people who are really active and alert to risk rather than a set of rules that people have to follow. I think a theme now is that organisations must be enabled to perform their own healing rather than having someone imposing onerous audits on them all the time in a way that says, ‘You’re a naughty boy’. Self-propulsion will work best.’
Most FDs would agree that internal initiatives are preferable to another raft of legislation, which will inevitably be complex and costly. And there is no certainty that the government will succeed in pushing through its proposals on corporate killing. But Prescott has made it clear he intends to fight cabinet colleagues for legislative time this autumn.
Even if the law doesn’t change, there are compelling reasons why all companies should take a more active approach to risk management. And whether a sacrificial safety director ends up in the dock or not, an increasingly impatient media is going to make all directors feel a great deal more uncomfortable when they’re judged responsible for injury or death. It’s never been good business to kill employees or customers, but in future the penalties – whether extracted by the law or the markets – will be greater than ever.
This article first appeared in Financial Directormagazine.