Boards can play a significant role in governing and guiding safety within organisations. Craig Donaldson examines this issue and explores new research into how boards can actively drive great OHS outcomes.
Given the importance of the board and the significant liability each board member has in terms of workplace safety, the role of the board has largely been ignored in workplace safety, leadership and corporate governance research.
Kirstin Ferguson, a professional non-executive director on ASX, government, private and notfor-profit boards, has recently completed a PhD, which is currently under examination, in the area of safety governance and safety leadership for board members and senior executives. She was able to identify four key safety leadership criteria relevant for board members and senior executives: vision, personal commitment, decision-making and transparency. “Each of these criteria is important individually, but when used together, particularly by the board as a collective in combination with the CEO and senior leadership team, safety leadership is enhanced,” she says.
“In addition, safety governance is also vitally important as it provides the structure through which the vision and commitment to safety is set; the means of attaining safety objectives are agreed; the framework for monitoring performance is established; and compliance with legislation is ensured. The relationship between the board and senior executive in terms of safety leadership and safety governance is vitally important.”
In conducting the research, Ferguson was interested in understanding how boards approached safety beyond mere compliance with relevant legislation given, on its own, such compliance does not ensure a safe workplace.
“I was also interested in understanding the changing trends in safety disclosures in annual reports and CSR reports, and to see whether what was being disclosed reflected what was happening within the organisation,” she says.
In terms of safety disclosures, she researched 10 years’ worth of annual reports and CSR reports for ASX200 companies to examine the changing trends in safety-related disclosures. What Ferguson found is that each of the four safety leadership criteria, vision, personal commitment, decision-making and transparency, could be identified in safety disclosures and each have increased over the past ten years.
The highest number of safety-related disclosures is in the area of decision-making with 89 per cent of companies in 2011 (compared to 58 per cent in 2001) disclosing the role of the board, senior executives and employees in making decisions around safety, or disclosing the existence of safety documents and systems. The research also found that the industry sector to make the most safety-related disclosures is the materials sector (24 per cent) followed by the energy sector (23 per cent).
The industry sectors to make the least disclosures were consumer discretionary (5 per cent) and health care (7 per cent) and financial services (7 per cent). “As a result of the research, I have been able to develop best practice guidelines for company disclosures on safety based on the four safety leadership criteria,” Ferguson says.
Implications for OHS professionals
The implication of these findings for safety professionals is the importance of engaging board members in safety beyond pure statistical analysis of lag indicators, Ferguson explains. “Not all board members have operational experience, particularly within the industry of the board on which they sit, and therefore do not have direct experience of the impact of safety leadership on safety performance,” she says.
“Safety professionals have a valuable opportunity to help educate board members on these issues through ensuring their reporting integrates statistical performance with matters relating to safety culture and safety leadership, as well as more broadly the strategy of the organisation to move safety beyond lag reporting.”
Very effective safety professionals understand the issues confronting the organisation across all areas and seek to ensure that the work they are doing in safety fully integrates with these other imperatives. For example, if there is a significant financial crisis facing the organisation, Ferguson says safety professionals should ideally brief the board on safety performance in light of those issues. “How will this distraction impact on time managers spend in the field? How will increased demands by the board on financial reporting impact the ability for those executives to focus on safety? What can the organisation do to arm themselves against any reduction in focus on safety while other issues are dealt with? These are just examples and every organisation will have unique situations for safety professionals to be abreast of rather than seeing safety as a standalone issue,” she says.
The role of boards on safety
Harold Downes, a partner with Herbert Smith Freehills, believes there is an increasing focus by boards on health and safety issues generally. “My concern is that board members have varying levels of sophistication and impact when making that focus. I often think that what board members do when they conduct their visible demonstrations of their ‘focus’ by visiting sites, amounts to little more than what I would call ‘safety tourism’,” he says.
“There is a serious deficiency amongst many board members’ appreciation of what they can influence and how they should do so. It is improving, but there is a long way to go. The manner in which they can satisfy themselves that they have ‘verified’ the provision and use
of resources intended to achieve acceptable levels of risk, is complex. I would like to see board members briefed on the high risks tasks before they go to a site, and for them to call for an explanation about how those risks are being mitigated. That, in my view, would achieve a greater result than them walking a site checking to see if PPE is being worn. In high pressure white collar environments, it may be that senior executives walk the floor late at night to see who is still at work, and why.”
Martin Kriewaldt, chairman at Hyne, Australia’s largest and most successful privately owned timber company, believes there are too many companies with poor OHS records, and in such instances, the board has to become involved. Many boards don’t get involved in culture either, according to Kriewaldt, who says culture plays a critical role in safety. “If you’ve got a bad culture, then you’ve got to start telling the chief executive to either fix the culture or start looking for another job,” he says.
“It’s exactly the same with OHS. If you’ve got a chief executive and managers who really are focused on it, then it’s not something that boards need to be focused on because it’s being done by the people who can seriously make the difference. You can have the most enthusiastic board on OHS but get nowhere if the chief executive and the C suite aren’t going to play ball.”
The safety-shareholder value link
At the highest level, better safety outcomes and performance do correlate with improved shareholder value, according to Kathryn Dent, director of People + Culture Strategies and nonexecutive director of the Cerebral Palsy Alliance. “A company found guilty of a WHS breach will face a significant penalty which will vary according to seriousness of risk,” she says.
“The penalty a company must pay will reduce the profit available for distribution so there’s a direct impact, but what is indirect and not easily quantifiable will be the adverse impact a breach (and even simply a poor history of safety through incidents and claims) has on the company’s brand and reputation and relationships with stakeholders – all of which in turn may affect shareholder value.”
For example, she says employees working in an organisation which has unsafe systems, plant and equipment may have higher incidences of lost time off work or higher turnover, both of which would likely impact on productivity and morale. Breaches may also lead to losses of commercial contracts and tenders, reducing the company’s work levels and profitability, which in turn may lead to higher turnover. “The incident itself may not only result in a penalty under WHS laws, but it may also result in other types of claims, for example, property damage, economic losses, workers’ compensation claims and so on,” she says.
Kriewaldt believes there is a firm link between a safe workplace and better productivity, however, he says not all board directors see or understand this link. As a result, some companies suffer from “some appalling safety records” and governments are updating laws and regulations to enforce what boards and executive management teams should be looking after.
“I have absolutely no doubt that a safe place is a more productive place and it’s better for shareholders,” he says. “I don’t think there are too many shareholders who would happy to get a dividend on the basis that someone has to go home maimed or dead. From my perspective, focusing on employee welfare is a big part of just being in business and doing the right thing for shareholders.”
Safety’s business value
OHS is typically seen as a cost centre in most organisations. However, from a board perspective, there are a number of steps OHS professionals can take to link operational safety priorities to a Board level perspective, and potentially add shareholder value in the process.
Dent recalls the advice of a chairperson who told her: “don’t look at things as a cost to the organisation but the value to it”. She says most boards would be committed to WHS and she advises safety practitioners to keep them updated, make necessary recommendations, be aware of the organisation’s risk appetite and if necessary work to change it. “WHS professionals need to communicate in practical and real terms that you can’t put a value on a workplace free of risk and which complies with health and safety laws,” she says.
“WHS professionals need to paint the picture of the cost of failing to comply because this is where the value is. Once an organisation has been prosecuted it will understand the value of compliance – you can’t put a price on someone’s life and the impact the loss of it will have on their family, friends and colleagues. As a director having a criminal record or being imprisoned is a huge risk to take for a fraction of the cost of ensuring your obligations are met. Even defending a small WHS breach carries with it a cost which attention to WHS compliance justifies.”
Dent says some more practical steps could also include the presence of a board member on an enterprise risk management committee, and the employment of not only a WHS professional who may alert and investigate WHS matters, but internal auditors that review fiscal and procedural processes for authenticity.
Downes says he is seeing clients secure work through tendering, particularly in the traditional hard hat industries of construction and mining, by effectively using good WHS systems and credentials to win work. “Being able to satisfy a client/principal that you know what you are doing, will make the management of you as a contractor easy, and have a reduced risk of an interruption to production for a serious WHS incident, makes you an attractive contractor,” he says.
“I also believe that many directors, particularly those who come from white collar backgrounds (the accountants and lawyers amongst us) do not generally have the same level of appreciation for high risk activities as engineers for example. It does require significant training for people whose careers have not included activity based hazard identification to become comfortable with those concepts, and what it might take to mitigate the risks which flow.”
Kriewaldt believes that it is important for OHS professionals to be focused on forward looking indicators. “If you’ve got a bad record on the lag indicators, obviously you’ve got to work to do there,” says Kriewaldt, who says process safety is also important and that OHS professionals should be looking at consequences rather than the outcome. “Dropping a wrench from a height that hits nobody to me is far more important than somebody twisting his ankle when stepping on a rock. A lot of people wouldn’t see it that way. I want to see that they’ve got their brains engaged and that they’re not out to just get me the numbers, but they’re out to get me safety,” he says.
“There are too many who see the number as the end game, whereas safety is in fact the end game. The number is simply a method of measuring past performance, but if they simply focus on past performance, they’re going to miss the big picture.”
A pathway to safety governance
To help identify where a board may currently sit in terms of their approach to safety Ferguson has established a five-stage safety governance pathway through her research. Safety professionals can assist boards to move through these stages by working with the CEO on effective safety presentations to the board and in identifying ways to engage board members in safety beyond only reporting on statistical indicators and the outcomes of investigations and audits, as examples.
“The least effective boards in terms of workplace safety appear to have a transactional approach where they take a minimal approach and see safety as a management responsibility, with the board generally only engaged after an incident has occurred. These organisations do not tend to make any disclosures about safety performance in their annual reports,” she says.
The harmonised safety legislation has seen many of these boards recently become compliance focused where the board is aware of their responsibilities in a legalistic sense and ensure basic safety reporting is in place (generally focused on lag indicators only). “A brief reference to safety may be made in an annual report such as the existence of a safety policy. Overall, compliance with legislation is the main driver rather than seeking to go beyond such requirements to understand the importance of safety leadership by the executive team and the resulting impact on safety culture,” says Ferguson.
It appears that once a compliance framework for safety has been achieved, boards often then become more focused on the issue beyond the legislation, frequently driven by an executive team or CEO with strong safety leadership skills. Safety may be included in the board charter at this point, a vision for safety and safety targets may be set, and lead indicators introduced. Often safety systems and processes are now disclosed in annual reports.
From this stage, Ferguson says boards might become more proactive in safety and are comfortable with their role in safety leadership. “Boards may seek even greater safety performance from their executive team and establish a sub-committee of the board to ensure safety receives the focus it requires. Often in this stage the Chairman makes a personal commitment to safety in their annual report and public disclosures may also include both lag and lead indicators,” she says.
The most effective boards with respect to safety ensure that it is completely integrated with the operations of the organisation. “The link between high safety performance and business excellence (or safe production) is known and accepted by the board and senior executive team. Clear statements about the role of the board are disclosed in annual reports and safety-related disclosures are honest and transparent sharing both the good news and the bad,” says Ferguson.