Survey and detailed interviews with creators, analysts and users of HSW information in the New Zealand business environment found a disconnect between what directors and senior management found useful and the HSW information being reported to them. Typically, HSW reports at board level focused on measures of poor safety performance such as incident frequency rates. Critical risk measures did not include an assessment of the quality and effectiveness of controls, and there was little information on the presence and sufficiency of H&S management systems.

Sustainability reporting frameworks, becoming more widespread and a common requirement for publicly listed companies, similarly recommend use of flawed lagging measures of HSW with only vague guidance on what leading measures may be more appropriate and useful. Although measures of environment and governance are well developed, social measures – where HSW sits within ESG – are immature by comparison.

It is not surprising that HSW is therefore mostly considered a cost of compliance at board level and during acquisition activity and does not attract the same level of focus as other competing issues such as environment, quality and bottom-line performance.

Seeing HSW as an Asset

Capacity – the ability to manage future HSW performance and outcomes – is acknowledged by most business leaders as an asset (a benefit to the organisation). Whether it can be treated more formally as an intangible asset consistent with accounting rules relies on finding a common method for setting fair value as well as tying future cash flows to that asset.

Research has shown that investment in HSW is a driver of bottom-line performance, not only by avoiding the costs of poor HSW performance but also through higher staff retention, increases in innovation and the systematization of business processes. Although there is evidence that future cash flows do derive from investment in HSW, there is no current common method of setting fair value for HSW capacity, therefore it does not meet the strict accounting requirements for it to be separately identified as its own intangible asset. However, it is allowable for HSW capacity to be included as part of goodwill on acquisition and therefore as a factor in the overall value of the business in certain circumstances.

Three Views on HSW Capacity

A three-level conceptual model was developed to address valuation of HSW capacity. When talking to users of HSW information, different elements of HSW were potentially showing different characteristics of value satisfaction. For example, at the Catastrophic risk level there was no upside value seen in not having a large-scale accident that resulted in widespread harm, but there were obvious significant destroyers of value associated with not having the capacity to prevent these situations. These value impairments often played out during due diligence and subsequent negotiations if plant, equipment, processes and/or competency of operators was not seen to meet a minimum required standard.

At the second Critical risk level, where occupational accidents occur infrequently and in isolation but with serious harm or fatal consequences, the investment in safety management systems, leadership and competency was perceived as having a strong financial upside, including the previously mentioned increase and retention of key talent, intellectual property and “professionalism” of the overall business. (Surprisingly, the costs associated with poor management of critical risk were not seen as significant in New Zealand, potentially because of the lack of enforcement activity, low level of fines and existence of ACC as a mitigator of financial risk for the business.)

The third and most prevalent level is that of Chronic risk. This tier includes all chronic conditions that affect people’s mental and physical health. The more people an organisation has in its business, the stronger the manifestation of this risk. Musculoskeletal disease, sprains and strains, depression and anxiety all result in lost productivity, higher staff turnover and impairments, which make the likelihood of critical and catastrophic risk higher. The relationship between value and chronic risk is well researched and generally stated is the financial return on investment shown by investing in strategies that minimize mental and physical occupational health risks. The more you invest, the more you drive bottom line performance.

A useful model for understanding value is found in the field of quality product development, specifically the Kano model which demonstrates different types of user satisfaction against the functionality of products. Applying the Kano model to the three levels of HSW risk has helped develop the conceptual HSW capacity model.

Using Better Measures of HSW Capacity

The research used the Kano value characteristics at the three levels to then develop potential measures of capacity at each level.

SURPRISINGLY, THE COSTS ASSOCIATED WITH POOR MANAGEMENT OF CRITICAL RISK WERE NOT SEEN AS SIGNIFICANT IN NEW ZEALAND.

The strategies and capacities for managing at each level are different, with catastrophic risk focusing on process safety concepts, resilience engineering and safety case management. Critical risk management is dominated by the presence of “above the line” controls and strong field supervision leadership, while chronic risk focuses more on the mitigation of workplace risk factors and enhancing supportive factors that encourage destigmatisation and early help seeking.

Once the drivers of capacity at each level are determined, and their appropriate measures, an overall conceptual model for valuation can then be derived. There are three different valuations at each risk level across the model.

Model: Next Steps

Currently the model is conceptual and requires further quantitative field testing to understand how to apply risk betas to reflect industry sector risk (similar to how earnings multipliers are used in firm valuations). However, in the interim, seeing HSW capacity as a benefit to the organisation and approaching the investment at each level using appropriate measures of capacity should enhance the board and organisation’s views on what that capacity actually is and whether it is enough to meet their risk appetite.

CHRIS ALDERSON is chief executive of CHASNZ. A chartered accountant, he recently completed his Master of Commerce at the University of Otago’s Accounting and Finance department with research focused on whether an organisation’s ability to manage HSW risk could be valued as an asset and therefore be seen as a component of firm value.