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Demonstrating leadership and corporate
social responsibility in Annual Reports
Dr Sharron O'Neill
IGAP Research Centre, Macquarie University
Dr Sharron O'Neill:
Thank you for inviting me here to speak today about demonstrating leadership and corporate social responsibility in annual reports. A quick overview of the presentation today. First, I'll speak a little bit about the history of annual report discloses on work health and safety and then give you some insights that we've found in our research at Macquarie University into current practices of reporting on work health and safety, some examples of what's been done well, some examples of things that haven't been done so well and that gives us some insights into how we can actually improve work health and safety reporting in annual reports.
So why the annual report? The annual report is an excellent vehicle for reporting on work health and safety. It's the main medium that we use to communicate with our external stakeholders and it's increasingly being seen as a vehicle for investors to find out about the way organisations manage risk, not just the financial information, but the non-financial information such as work health and safety. In the research that we have conducted, stakeholders see the annual report as a particularly credible source of information for reporting on work health and safety, more sothan sustainability reports and more so than websites and other forms of corporate media.
There's actually quite a long history of reporting work health and safety information in annual reports. For example, I did spend some time down at a library in Canberra looking at the 1820s annual reports from the Australian Agricultural and Pastoral Company where they talked about people that had been off work due to sickness and injury and illness, and this is 1823 to 1825. Now even back then, although there was some reporting, it was very sporadic and there was the occasional mention of gases in mines and those sorts of things but it was really about trying to highlight where companies had lost money due to illness and injury or due to working conditions.
In the 1980s -'70s '80s and '90s, westarted to see a real move towards corporate social responsibility, and with that, there was an explosion in the number of companies that were reporting on health and safety in annual reports. And there was increasing attention, but it's really become mainstream in the last 10 to 15years, and it's not only the companies that are now reporting on health and safety,but the public has come to expect it.
So, the issue is ‘the quality’. ‘The quality’ of that information in general is quite poor. In terms of the early research, when we first started looking - and this is particularly in the accounting discipline – when we first started looking at annual report information on work health and safety, in the 1970s and '80s there was a lot of focus on, "Is the information there?" So, "Do companies report on health and safety - yes or no?" We startedcounting pages and sentences and numbers of words because that gave an indication of how much focus orhow much importance the companies placed on those particular disclosures and on that information.
Then attention started to turn towards the quality of information,so not just interested in was it there but what sort of information was being provided, and so organisations' reports were being assessed and analysed in terms of was the information just qualitative or quantitative, was it full of motherhood statements and claims about – you know – "We're best practice," or were they actually providing information? So they were looking at, "Is there positive news as well as negative news?", "Is there a balance?", "Is there quantitative information as well as qualitative?"
More recently that investigation of quality and quantity has become more targeted and focused. The examination is really looking now at the quality of content in terms of is that information relevant to the users that it's intended for? Is it reliable? Is it verified? So no longer are those motherhood statements about, "We look after the work health and safety of our workers?" Enough. We now have to go beyond that and we're looking for evidence.
One of the interesting issues around that is the issue of verifiability - independent assurance. I'll talk in a few moments about some of the studies we've been doing,but one of the interesting things that we noticed in some of the reports is we have seen reports where they say, "We're going to link executive bonuses to work health and safety performance and we're doing that because that information is able to be measured objectively, and it's easily verified."
Yet in other reports we looked at, they had independent assurance of all of the social and environmental information, but health and safety was explicitly excluded from the scope of those audit reports, and so that's been a really interesting issue to look at in terms of why is that information being excluded. The current research that we're doing at the moment, we have two projects going looking at work health and safety evaluation and reporting sponsored by Safe Work Australia. Both are being conducted with the Safety Institute of Australia and we also havethe Institute of Chartered Accountants and CPA Australia involved in those projects. And this work is informed by prior research and the prior research has looked two aspects – one, what do stakeholders want to see in reports, what's important to the different stakeholder groups, and secondly, what are companies actually providing? And the examples I'll present today come from two studies that you can see there – one is a study of mining and energy firm disclosures over a period of 10 years in annual and sustainability reports. The other study, is a study of work health and safety disclosures from a whole range of different industries and they were largecompanies in the ASXTop 50.
What we found looking at both of those content analysis studies is that in general there's increasing evidence of reporting on work health and safety in annual reports, although there's a wide variation in the quality of that data, and there is a substantial gap between what the stakeholders are expecting to see and what companies are actually reporting. And so these are the issues that we'd really like to talk about today.
In terms of demonstrating governance, upfront, this is the most important, the first thing we should be looking at. Does the company value work health and safety, and how does it express that? When we looked annual reports, most of the firms stated a commitment to work health and safety.They had a statement in there that talked about their vision, for example I've got an example there from an annual report - number one –“Nothing is more important to your Directors than ensuring the safety and security of our employees.” Nowwe saw a lot of statements like that. They became increasingly prevalent. However, while they are important and they need to be there, they're also very easy to write. So,they're important but they are not sufficient. They need to be backed up by evidence and you can see anexample we have there from another report which talks about ‘the committee reports to the board and it talks about the structures’, how thatgovernance is enacted. ‘The auditors perform reviews, there's written reports’ and it starts to give you some evidence for how governance is actually practised within the organisation. So, adding that level of evidence is important.
Similarly, with reports on strategy some of the organisations were very vague. "We continue to reinforce our steadfast belief that we must never take the health safety of our people for granted and the pursuit of zero harm remains our overriding goal." Aside from the arguments about whether zero harm – we're not going to get into whether it's a goal, a vision or an objective, but the idea that we don't want to hurt people is obviously very important. We need to see that, we need to know the company believes it. However again, some evidence to justify,to explain that, to show how they go about meeting that objective is really important.
And so some of the examples we had there, and you can see, talking about what's explained elsewhere in the annual report, how they actually demonstrate what they're doing about meeting that goal, continuous improvement projects, talking about some of their risks, talking about some of the management strategies - these are all very important things for investors and other stakeholders to see. So the key there is providing evidence.
Now as we move from the early '90s to the mid '90s, we started to get out of the ‘motherhood statements’ and back it up with a little bit of qualitative evidence. More recently we've seen companies start to try and look at leading indicators and that's a really important way of providing evidence as to the effectiveness of the processes and projects and initiatives that have been put in place to manage health and safety.
In terms of leading and lagging indicators we see a lot of reports that talk about injury rates but there's very few that focus on the front end there, the leading and lagging indicators of the critical processes used to manage health and safety. So for example,‘consultation’. A leading indicator of consultation might be how many of staff we have consulted about health and safety issues. A lagging indicator or an effectiveness indicator would be saying something about how many suggestions offered by those staff have actually been adopted.
In the annual reports we tend to see a focus on auditing, so the number of audits conducted. We see a lot of evidence around training conducted. We see very little in terms of the effectiveness of audits or training and there's certainly a lot of room for improvement there, and we look forward to seeing that happen in the future.
Unfortunately, where a lot of the reports do seem to be stuck, and this has continued over nearly 20 years now, we'veseen an increasing number of firms reporting primarily on injury and illness rates. Certainly, not saying that's not important. We need to see that information. However, there's a lot of focus on fatality and lost time injury rates, and unfortunately that's not terribly helpful. We've seen a lot of new companies coming into the realm of reporting on work healthand safety look around and say "What's everyone else reporting on?" - lost time injury, so they join that sort of flock of lost time injury advocates which has been a bit of a shame because it's not a useful measure for reporting in annual reports, and I'll just talk a little bit about why.
Lost time injury rates don't measure safety and they certainly don't measure health and safety. Safety is about ‘the absence of risk of injury and illness’, so the injury rates will tell you if there has been an injury but they won't tell you anything about the risk that’s been there, particularly if injury rates are low. As well as that, lost time injury rates,they're only a subset of injuries and illnesses. They fail to capture most incidents, they don't capture illnesses very well at all and they fail to captureall the work-related injuries, so they're not a valid measure of frequency and they don't capture all of those injuries for a whole range of reasons, whether it's underreporting or whether it's that the injuries are captured in different categories such as medical treatment injury. They're also too aggregated to inform about the consequences of injury.
A lot of people will say and we see it in annual reports all the time, "We measure lost time injury rates," they say,"because it tells us about our serious injuries," but that's not necessarily true because we could have a permanent hearing loss for example, which is a serious injury, and yet, if that person hasn't had to take an entire day off work due to that hearing loss, it won't be captured as a lost time injury. It will be captured as medical treatment which is perceived by many managers to be a more minor classification. Similarly with musculoskeletal injuries, sometimes you can have injuries where people will be affected for months, years, even whole-of-life, due to say, a back injury or a shoulder injury, and yet they may not be captured as a lost time injury. So they're viewed as a more minor category of injury.
So in terms of those measures, lost time injuries, if they're not capturing illnesses, they're not capturing severity or frequency very well. We then thought we'd have a look and see, "Does that actually work on a larger scale?" "Can we show - demonstrate that that actually is the case, that they don't capture severity very well?" So in one study that we've completedfairly recently we took all of the data from New South Wales workers compensation over a period of 10 years and we graphed the injuries, we graphedfatalities and we graphedlost time injuries, and you can see there both of those are trending down. And so that demonstrates that New South Wales has been very successful in reducing fatalities and lost time injuries over that period, and that's what we want to see.
We then took exactly the same injuries and we reclassed them. We classified them as either permanently disabling or temporarily disabling, and what we found was the temporarily disabling injuries went down quite severely, but the permanent disabilities almost doubled in that period, and that data was completely hidden if we were just looking at lost time injury rates.
And so this is the problem that we have in industry. Most managers get lost time injury andfatality data, and this is also the information that is most commonly produced in annual reports to investors and other stakeholders. So as a result, the users of those reports aren't able to see the information that could really tell them about the consequences of work health and safety outcomes.
If we look at the traditional way that we would view categories of injury and illness, Heinrich's triangle, Bird's triangle, those kinds of traditional triangle models that tell us that we have first aid treatment which is the most minor, we've got medical treatment, restricted duties and then lost time injuries with fatalities at the top. What we see from that is that lost time injury rate aggregates a whole range of different categories of the injury and illness, and a range of different severities. By placing the triangle that way up, it looks as though the focus and it does direct the focus to the bottom of the triangle, the most frequent injury and illnesses.
And so, in a sense we'retrying to capture the low-hanging fruit. We're trying to prevent the short-term absences and the moderate absences. This is a very production or work focused perspective because those categories really reflect what the business does – Does it offer first aid? Does it offer medical treatment? Does it give the person time off? - and it fails to focus on the outcomes, the consequences,both socially, the consequences for the employees and to a large extent, the consequences financially for the organisation because if we look at the cost, the cost of fatalities and permanent disabilities are significantly higher than the costs of short-term absences, and you're talking about differences of over 80,000 for the disabilities down to less than 1,000 for the minor injuries.
So,we've been looking at this alternate model and this is a model developed by Jeff Macdonald many years ago. It's been used around Australia in a number of organisations and it's really looking at reframing the way we view injury and illness. It turns the triangle upside down and it puts the focus on the injuries that are the highest consequence. Irrespective of how much time the person has had off work, it's about time to recovery, not time back to work. So class one are those most debilitating injuries and illnesses that cause a permanent disability or a fatality, orthat have a long-term impact on the individual. Class two are the temporary impairments and class three are those that really don't have any sort of life altering difference, more of an inconvenience really.
So, if we turn the triangle that way and we start looking at severity by saying, "Okay,we've got these totalclass one plus class two," essentially if you add them together it's going to be something very close to a TRIF – a total recordable injury rate because you've captured all of those injuries that are really everything over first aid, and we then can separate out class one, so we can identify which of those injuries that are going to have the most significant impact. Ittakesa human perspective.
When we were looking at annual reporting studies, in the early '90s and mid '90s, we did see a number of organisations that were reporting class one. They didn't call it that, but they were reporting on not onlyfatalities, but permanently disabling injuries and also those that caused long-term impairment. However,we then saw this move towards lost time injuries and a lot of that permanent disability and serious injury reporting has disappeared. We saw some other issues in the reporting which are worth mentioning I think, in terms of injury and illness data quality, and that was around reliability and comparability issues. For example, different firms reported on different measures - some would report lost time injuries, somewould report medical treatment,some would report total recordables, some would report an all injury rate - so you really couldn't compare where they stood, make any sort of meaningful comparisons between the organisations. But it actually went further than that.