ESG Focus: Counting Psychosocial Costs On ASX

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Counting Costs Of Psychosocial Failure And Compliance

Companies are expected to ramp up their psychosocial safety strategies in 2024 following a slew of legislation and legal precedents in 2023 and ahead of new disclosure standards this year – and the ASX’s December-half reporters show corporations have been getting their house in order.

-February reporting season reveals safety focus
-How much will it cost?
-New legislation puts companies on notice
-Corporations prepare for disclosure standards
-Legal cases setting precedents
-Strategic approaches
-Fatalities, TRIFRS and LTFRS in spotlight

By Sarah Mills

As the era of the “Renaissance Man-ager” dawns, Australia’s corporate chiefs are preparing to prove their metal as all-round managers, to prove their ability to extract value from all areas of the business, including human capital, by attracting top talent, keeping that talent, reducing sick days and legal suits, and getting the best performance and productivity from staff and by natural extension, their strategic investments.

While this was theoretically always the case, no real attempt has ever been made to measure many of these costs and, as the old saying goes, you can’t manage (or reward) what you can't measure. Typically human value has gone by the wayside as managers focused on more reportable metrics.

All that is about to change, as corporations face off at the human-value corral having had the stage set through legislation and legal precedents and incoming disclosure standards, which will allow investors to see for the first time how well companies compete in this arena.

Investors will be able to see who are using their staff efficiently rather than engaging in false economies.

ASX companies started getting their houses in order in 2023. 

Safety, both physical and psychosocial, proved the “social” standout in the February 2024 reporting season, the latter garnering particular attention as companies started counting the potential costs of failures on this front to the corporation and shareholders.

Some companies set themselves up in opposition, choosing to focus on the compliance costs of rising to this challenge, which somewhat missed the point, given the proven cost to companies of poor retention and attraction of staff. 

BHP Group ((BHP)), for example, estimated the cost of Same Job-Same Pay Legislation at $1.3bn while apologising for underpaying 30,000 staff for years and paying the $280m owed (just as well given federal legislation on wage theft). 

Either way, compliance costs or losses through poor management of strategy and operations, these costs are significant.

I am yet to see data on the full estimated compliance costs for the social imprimatur on corporate Australia, but based on BHP’s estimated loss from one piece of legislation, it appears we are looking at hundreds of billions of dollars. 

The cost of staff turnover was a bit easier to get a handle on. Based on turnover of 1.3m people in the year to February 2023, according to the Australian Bureau of Statistics, multiplied by $100,000 (which appears conservative given estimates of the cost of replacing a staff member is said to be three times their salary – although this figure varies widely), we come up with a figure of $130bn.  

And this is just the tip of the iceberg. Toxic environments breed lost productivity, sick days, poor work outcomes and strategic failure or under-achievement – and it all adds up.

Some of this is unavoidable, but a good percentage is avoidable and these are the dollars investors are targeting.

Three Decades Of Ignoring Human Capital 

Underlying the “social” push is the implication that human capital inefficiency has been rising sharply (albeit masked by other productivity growth factors such as technology) due to poor management (overworked workers, for example, tend to underperform, so gains in payroll achieved by longer hours may be a false economy).

The expectation is that the targeted redressing of social themes will raise corporate performances, and at the very least make visible the psychosocial costs to an organisation and investors of human capital issues such as staff retention and attraction.

One good example of a psychosocial opportunity is change management. 

The bungling of change management costs the corporate sector untold billions while creating unnecessary stress on employees. It is hard to count the number of companies that spend big on IT investments, the benefits of which are largely lost due to poor change integration. Not only is a great deal of the IT investment squandered but the collateral damage to human capital and organisational strategy can be hefty.

Psychosocial investment is expected to drive management focus to extract such strategic efficiencies, and rein in the potential for ever-devolving corporate chaos.

Modern Slavery And Governance Get A Look In

Elsewhere in the February reporting season, companies continued to flock to the Indigenous theme while the Modern Slavery theme tended to focus on tidying up supply chain reporting in anticipation of reporting standards.

Governance also attracted attention, the number of remuneration strikes and intensity of those strikes rising sharply.

We will discuss these social themes in a separate story.

Disclosure To Help Investors Count Costs

As disclosure standards roll out along with the green transition, major Australian companies are recognising the strategic importance of the physical and psychosocial safety remit.

Incoming disclosure standards  (Australian reporting standards are expected to land in July) will introduce increased transparency on big dollar issues such as staff attraction and retention, as well as reputation, legal and compliance risks. 

Across Macquarie’s ASX coverage, average voluntary staff turnover improved to 16.2% from 17.7% in FY22, but this is still well above FY21 levels of 13.4%.

Of all of Macquarie’s coverage, 49 companies now report on voluntary turnover, down from 68 in FY22, suggesting reporting reticence.

Generally, labour tightness improved in the December half, resulting in lower employee turnover across several companies, including Ampol ((ALD)), Cleanaway Waste Management ((CWY)), Iluka Resources ((ILU)), Rio Tinto ((RIO)) and Ventia Services ((VNT)), observes the analyst.

Companies are also expected to get their supply chains under control to ensure the psychosocial can isn’t being kicked further down the chain to contractors.

Given psychosocial safety is widely being viewed as a benchmark for the quality of management and returns going forward, investors and companies can expect more of such cases as governments set higher standards of corporate behaviour.

Legislation Precedes Disclosure

Legislation was introduced in 2023 in anticipation of “social” disclosure.

Last year, the Respect@Work Act was introduced placing a new positive duty on employers to eliminate workplace sex discrimination and sex-based harassment. 

Jarden expects many companies will struggle to fully meet these obligations, which at some stage is likely to result in expensive court cases.

Under the act, the Australian Human Rights Commission is tasked with monitoring and assessing compliance as of December 12, 2023, and publishing compliance notices once it detects a breach.

Poor performance in these respects could also attract the attention of the Sex Discrimination Commissioner.

Same Job Same Pay legislation has also placed the cat among the pigeons.

The Australian government also advised wage theft would become a federal offence under its Closing Loopholes bill. Wage theft appears to be rife in both ASX organisations and the broader business arena.

Legal Precedents Setting The Stage

In a shot across the bow, several ASX-listers were dragged before the courts on psychosocial issues in 2023, setting precedents and standards for future actions.

National Australia Bank ((NAB)), for example, agreed last year to pay employees an extra 17.5% over four years and to allow flexible work arrangements in a settlement with the Finance Sector Union, which sued the bank in the Federal Court for creating an environment in which people were forced to work between 55 to 80 hours a week over several years. 

The union was demanding compensation for damages to the individuals’ health and family life.

The bank was also ordered to open up its payroll data after a black, female trader sued on the basis of being underpaid and discriminated against because of her race and gender.

In October, NAB was again sued in the Magistrates’ Court for allegedly contravening Victoria’s Long Service Leave Act.

Already, in February, the Federal Court hit Commonwealth Bank ((CBA)) with a record $10m fine for wage theft (a slap on the wrist given the bank’s profitability). 

Westpac ((WBC)) also faced a test case last May after being sued by a senior manager claiming he was owed more than $300,000 in back pay and damaged for working up to 100-hour weeks for as much as 32-days straight after the bank ignored under-staffing concerns.

Identifying Psychosocial Safety Issues

Psychosocial safety covers a broad range of corporate responsibilities.

Jarden observes psychosocial safety goes beyond the duties laid out in the act and from an investors perspective encompasses “hazards” such as inadequate reward and recognition (often the case with female and ethnic employees), poor support, and unreasonable job demands, most of which come under the remit of leaders.

Inadequate reward and unreasonable job demands can constitute wage theft, for example.

The analyst lists as other common hazards: low job control, lack of role clarity, poor organisational change management (this can prove extremely expensive to a company not to mention stressful to staff if mismanaged), poor organisational justice, traumatic events, remote or isolated work, poor physical environment, violence and aggression, bullying, and conflict.

Sex and racial discrimination and harassment and mental health issues also fall under this heading.

February Reporting Season Shows Companies Getting In Gear

While it’s early days yet for corporations, Jarden gave Australian companies a broadly favourable physical and psychosocial safety report card after the February reporting season.

The analyst observed companies clearly stated any fatalities, unlike the June season, albeit the number of fatalities rose sharply, illustrating the importance investors are placing on transparency at this stage of reporting development.

Jarden found that of 40 companies under its coverage which reported a safety statistic, 31 improved (63%), 17 worsened (35%) and one (2%) was steady.

All up, 20 companies mention psychosocial issues, mostly resources and industrial companies, and broader well-being measures were mentioned.

Fortescue Metals ((FMG)) appears to have taken the metric very seriously and moved beyond reporting to investment.

The company announced spending of $147m to deliver 10 activities to enhance psychosocial safety after agreeing its Enforceable Undertaking with Worksafe.

Worley ((WOR)) piloted an approach for identifying, assessing and treating workplace psychosocial hazards.

Cleanaway rolled out a company-wide cultural-change program Respect@Cleanaway and mandatory training – culture is a sensible place to start a series of change programs given it enhances the prospects of success of operational change programs.

It would be interesting to see what approaches such as Worley’s and Cleanaway involve and what constitutes best practice.

Psychosocial Reporting To Ramp Up

Jarden expects approaches to psychosocial safety in particular to ramp up in FY24.

Macquarie agrees.

Macquarie observes companies to include psychosocial risk assessments, training, enhanced frameworks and other well-being programs in the December half included Adbri ((ABC)), AGL Energy ((AGL)), Ampol ((ALD)), ARN Media ((ARN)), Aurizon Holdings ((AZJ)), Emeco Holdings ((EHL)), GUD Holdings ((GUD)), IGO ((IGO)), Iluka Resources, JB Hi-Fi ((JBH)), Lendlease ((LLC)), Macmahon Holdings ((MAH)), Monash IVF ((MVF)), Perenti ((PRN)), QBE Insurance ((QBE)), Vicinity Centres ((VCX)) and Worley.

Jarden reports that companies are providing greater transparency:

• ANZ Bank ((ANZ)) reported its Code of Conduct breaches related to equal opportunity, bullying and harassment as a percentage of total breaches.
• Medibank Private ((MPL)) has listed the number of incidents reported internally and those substantiated, broken down by bullying, inappropriate behavior, misconduct, discrimination, fraud, sexual harassment and other.
• Bendigo & Adelaide Bank ((BEN)) has reported the number of whistleblower cases by type, including by bullying and harassment and discrimination, inappropriate conduct, sexual harassment and workplace conflict.
• NIB Holdings ((NHF)) has reported the number of Code of Conducted breaches, reported and substantiated, by bullying inappropriate behaviour, discrimination and sexual assault.
• NAB introduced its Heartbeat Survey Wellbeing Score.

Jarden Psychosocial safety snapshot across S&P/ASX100 financial and insurance sectors

In a separate paper, Jarden says psychosocial safety is not being well reported by the financial and insurance companies under its coverage “despite a new positive duty being in place and companies in the sectors commonly having: (1) long working hours; (2) having high performance expectations; and (3) being male-dominated.

The companies examined included AMP ((AMP)), ANZ Bank, Bank of Queensland ((BOQ)), Bendigo & Adelaide Bank, Commonwealth Bank, Insurance Australia Group ((IAG)), Macquarie Group ((MQG)), Medibank Private, NIB Holdings, NAB, QBE Insurance, Suncorp ((SUN)), and Westpac,

While being identified as strategically important, none of the sample have as yet quantified investments in the psychosocial theme (although investment is evident), observes Jarden.

Roughly 62% of the sample (AMP, ANZ, Bank of Queensland, Bendigo & Adelaide, Macquarie, NAB, QBE and Westpac) have instigated claw-back provisions in remuneration reports for leadership failures on these fronts, advises Jarden.

Of these, the analyst found 11 had disclosed a clear governance structure for psychosocial safety. The two outliers were Macquarie and Westpac.

Companies are already taking steps to satisfy the law and have launched a range of initiatives, although their efficacy will take some time to discern.

Jarden observes measures include: training on psychosocial safety, harassment, and the responsibilities of bystanders; employee assistance programs; and support for a “speak-up” culture.

Investment in training was reported by all of the sample save AMP, Bank of Queensland, Commonwealth Bank, and IAG.

Westpac and CBA are surveying staff to conduct risk assessments and gain insights and Medibank Private has developed physical health and well-being check-ins for employees to launch in FY24.

NAB employees are covered under new work-from-home conditions that observers expect could set a precedent for the banking industry.

To date, only engagement metrics have been broadly linked to remuneration.

Incident Reporting Please, Demand Analyst

Analysts are calling for incident reports for both physical and psychosocial instances.

Jarden suggests transparent incident reports is a strong first step to establishing base-level benchmarks and quantified investment would also provide a good basis for comparison.

In particular, Jarden calls for psychosocial safety to be pushed beyond governance structure to be linked to board and management remuneration to incentivise leaders.

Top Line Statistics

Now for the annual round-up of physical safety statistics for the December half.

Fatalities incurred in the S&P/ASX200 totalled 22 in 2023 and Jarden reports 10 fatalities already in the six weeks of 2024 leading into reporting season, with the resources sector posting a big increase.

Post June-30 fatalities included those at Alumina ((AWC)), BHP, which reported its third fatality in 13 months; Capricorn Metals ((CMM)); Downer EDI ((DOW)), which reported two fatalities; Graincorp ((GNC)), Mineral Resources ((MIN)), Newmont ((NEM)), Nickel Industries ((NIC)); Qube Holdings ((QUB)); South32 ((S32)) and Woodside Energy ((WDS)).

Rio Tinto’s ((RIO)) own operations were fatality free but four Rio employees and two airline crew members died in a plane crash while travelling to the company’s Diavik diamond mine in Canada. 

Those that managed to avoid fatalities advertised this in their results. 

Newmont advised it was developing a fatality risk management program. 

Jarden has found no link between fatalities and leading or lagging safety indicators.

Safety First

On the safety front, 49 companies reported safety statistics, observes analyst, with 31 improving, 17 deteriorating and one steady. 

Macquarie reports injury rates were mixed and identified culture, complacency and procedural lapses for company failures to improve year on year.

Higher injury rates were recorded at Beach Energy ((BPT)), Cleanaway, Downer EDI, Fletcher Building ((FBU)) and Maas Group Holdings ((MGH)). 

TRIFRS and LTIFRS

Major companies are now regularly reporting on Total Recordable Injury Frequency Rates (TRIFR) and Long Term Injury Frequency Rates (LTIFR).

At Coles ((COL)), Downer, Incitec Pivot ((IPL)), Monadelphous ((MND)), Santos ((STO)), Woodside Energy and Woolworths ((WOW)) TRIFRs worsened while improvers included Worley, Amcor ((AMC)), Orora ((ORA)) and Wesfarmers ((WES)).

Beach Energy proved a shocker, its TRIFR rising to 6.0 by December 31, compared with 2.4 at June 30, mainly due to contractor injuries. The company is conducting a review. 

Maas Group’s LTIFR rose to 5.6 from 3.7 during the half. 

AGL Energy ((AGL)) and Transurban’s ((TCL)) injury rates rose 

Injury rates rose at Cleanaway, Downer EDI, GWA Group ((GWA)) and Monadelphous.

Places you might like your children to work included Aurizon, Ingham Group ((ING)), NRW Holdings ((NWH)), Origin Energy ((ORG)), South32 ((S32)), Wesfarmers and Whitehaven Coal ((WHC)), which all reported an improvement in injury rates.

In the building sector, Macquarie observes Adbri, Boral ((BLD)) and Sims ((SGM)) all improved their TRIFRs, while at BlueScope Steel ((BSL)) rates were relatively flat.

GUD Holdings advised it was engaging a specialist consultant to conduct a systems and culture review of 12 key business units. It was short listed in AFR’s 2024 Best Places to Work award.

NRW Holdings’ TRIFR improved to 4.56 from 5.06 and female participation in the workforce rose 1%

While South32 posted a decent improvement in its TRIFR of 70 basis points, its long-term injury frequency rate rose to 2 from 1.4.

Its hazard frequency rose 29% but Macquarie sheets this back to an improved reporting culture.

Downer EDI’s TRIFR rose to 2.77 from 2.68 and its LTIFR rose to 0.96 from 0.9

Amcor, Orora and Sims improved their TRIFRs as did Aurizon and Brambles ((BXB)).

IGO posted big TRIFR improvement of 12, down from 19.5 in January 2022 says Macquarie.

Iluka Resources’ TRIFR fell to 2.4 from 6.9 the previous year and the company reported it had reached 50% female board representation.

Woolworth’s TRIFR rose 11% in 2023 but the severity of injuries fell.

Regis Resources ((RRL)) reported low injury rates.

In our next article, we check out the ASX’s performance on the indigenous relations, modern slavery and governance fronts.

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

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