Safety Case Study – Paul O’Neill

Please enjoy this well-written safety culture case study by Rodd Wagner

Paul O’Neill’s tenure at the helm of Alcoa is now the stuff of legend.

Introduced to a group of investors and analysts in October 1987, he didn’t talk about revenue and expenses and debt ratios and earnings before interest, tax, depreciation and amortization. “I want to talk to you about worker safety,” he told the Wall Street crowd.

“Every year, numerous Alcoa workers are injured so badly that they miss a day of work,” he continued. “Our safety record is better than the general American workforce, especially considering that our employees work with metals that are 1,500 degrees and machines that can rip a man’s arm off. But it’s not good enough. I intend to make Alcoa the safest company in America. I intend to go for zero injuries.”

Paul O'Neill speaks in 2002 during his time as U.S. treasury secretary, after he led impressive... [+] gains in safety and stock performance at Alcoa.

Paul O’Neill speaks in 2002 during his time as U.S. treasury secretary, after he led impressive gains in safety and stock performance.

When one attendee asked about inventories and another asked about capital ratios – the standard vocabulary for these kinds of sessions – O’Neill returned to the same theme.

“I’m not certain you heard me,” said the new CEO. “If you want to understand how Alcoa is doing, you need to look at our workplace safety figures. If we bring our injury rates down, it won’t be because of cheerleading or the nonsense you sometimes hear from other CEOs. It will be because the individuals at this company have agreed to become part of something important:  They’ve devoted themselves to creating a habit of excellence. Safety will be an indicator that we’re making progress in changing our habits across the entire institution. That’s how we should be judged.”

One of the investors told author Charles Duhigg he bolted for a phone after hearing O’Neill’s declaration. “The board put a crazy hippie in charge and he’s going to kill the company,” the investor said he told his clients. “I ordered them to sell their stock immediately before everyone  else in the room started calling their clients and telling them the same thing.”

“It was literally the worst piece of advice I gave in my entire career.”

A prescient investor would have gone long on Alcoa stock. “By the time O’Neill retired in 2000, the company’s annual net income was five times larger than before he arrived, and its market capitalization had risen by $27 billion,” wrote Duhigg in his bestselling book, The Power of Habit. “Someone who invested a million dollars in Alcoa on the day O’Neill was hired would have earned another million dollars in dividends while he headed the company, and the value of their stock would be five times bigger when he left.”

“What’s more,” Duhigg wrote, “all that growth occurred while Alcoa became one of the safest companies in the world. Before O’Neill’s arrival, almost every Alcoa plant had at least one accident per week. Once his safety plan was implemented, some facilities would go years without a single employee losing a workday due to an accident. The company’s worker injury rate fell to one-twentieth the U.S. average.”

O’Neill hasn’t been at the helm of Alcoa for nearly two decades. The Power of Habit was published seven years ago. With the passage of time, what are we now to make of the story of O’Neill making safety the lever to improve the entire firm? There are three possibilities.

A. It was just an anecdote, a situation unique to Alcoa at that time and O’Neill’s management style. We shouldn’t read too much into it.

B. The key to Alcoa’s turnaround was not safety per se, but obsessing over something important – a “keystone habit,” as Duhigg would call it. For O’Neill, it was safety. But a company can get comparable results from focusing on customers, innovation, operational excellence, employee engagement or some other goal integral to the company’s success.

C. The connection between performance and the discipline needed to achieve a stellar safety record is robust and unique. A leadership team that cracks the code on keeping people safe will simultaneously drive higher levels of performance in ways otherwise difficult to accomplish.

The evidence accumulated since O’Neill stepped down and especially since The Power of Habit was published appears to contradict A, support B and give a nod toward C. Putting safety first is one of the best strategies, and sometimes the best strategy, for getting an organization to realize its potential.

Beyond the loss and suffering they cause, accidents are expensive. The National Safety Council estimates that in 2015, work injuries cost companies $142.5 billion and the more common off-the-job accidents cost an additional $358.3 billion.

Lost production time from on- and off-the-job mishaps that year totalled 360 million days. The work-related accidents alone cost $45.8 billion in lost wages and productivity, $31.4 billion in medical costs, $46.1 billion in administrative expenses, damage to vehicles of $3.6 billion and fire damage of $4.3 billion. The NSC estimates the average worker needs to produce goods or services worth $900 in a year just to offset the cost of work injuries at his or her firm.

In isolation, safety investments have a strong direct return on investment. For example, a six-year study of an energy firm found that “strategic investments in occupational safety and health cost the company EUR 0.8 million. However, EUR 1.8 million were saved in the same period, resulting in a 2.20 cost-benefit ratio. The trend in cost savings is strongly positive.”

No one is arguing that reducing these costs, large as they are, is enough by itself to turn a company around or make it substantially more profitable. Instead, those who study these things for a living find, as O’Neill asserted, that safety is a natural rallying point because it’s as much in the employees’ interest as in the company’s. They also find that, if executed well, safety demands the kind of universal attention and teamwork from which every other corporate initiative benefits. “To protect workers,” Duhigg wrote, “Alcoa needed to become the best, most streamlined aluminum company on earth.”

A simplistic view of accidents considers just the proximate causes – the stuff that can be diagrammed and written in concrete terms in an OSHA report. Was the employee speeding? Did a worker fail to unplug the machine? Did no one clean up a chemical spill? Was someone texting while driving?

But the research on accident prevention shows connections throughout the organization, from leadership to culture to employee engagement to sleep. “Effective risk prevention,” wrote three members of the civil engineering faculty at the University of Aveiro in Portugal, “can only be achieved by a global correlation of causal factors including not only production ones but also client requirements, financial climate, design team competence, project and risk management, financial capacity, health and safety policy and early planning.”

Those are the operational realities. Compounding their effect are the motivational truths. When employees believe their employer is aiming to keep them safe, it unleashes the kind of reciprocity that affects more than just the accident rate.

In a 2012 CNN interview, O’Neill called it “discretionary energy” delivered when employees are “treated with dignity and respect every day. . . A down payment on that is nobody ever gets hurt here because we care about our own commitment to our safety, and we care about the people we work with. And it swells up to into everything you do, so it creates the sense of pride about the organization you’re involved in.”

A study of truck drivers found ratings of their company's "safety climate" correlated with... [+] engagement, job satisfaction and retention.

A study of truck drivers found ratings of their company’s “safety climate” correlated with engagement, job satisfaction and retention. 

Confirmation of that reciprocity has since emerged in a 2016 study of 6,207 truck drivers. It found that their perceptions of the company’s safety climate (based on questions such as, “My company uses any available information to improve existing safety rules”) were predictive of their levels of job satisfaction, engagement and the subsequent turnover rate. “Our findings support previous studies that workplace safety does not only have an impact on traditional safety outcomes,” wrote the researchers, “but it may also be related to outcomes highly relevant to an organization’s effectiveness and success.”

But where’s the Alcoa-style boosting of stock prices? Evidence of that can be found in a 2016 analysis of returns for those organizations that won the Corporate Health Achievement Award, established in 1995 by the American College of Occupation and Environmental Medicine to “recognize the healthiest, safest companies and organizations in North America.” Seven researchers tracked what would have happened if an investor bought stock in CHAA-winning companies at the beginning of 2001 and rebalanced the portfolio each year when new winners were announced (including doubling or tripling down on companies that earned the award multiple years).

Companies that scored high in the CHAA safety category outperformed the market by three times, achieving a return of 314% compared to the S&P’s 105% during the same period. “This study adds to the growing evidence,” wrote the analysts, “that a healthy and safe workplace correlates with a company’s performance and its ability to provide positive returns to shareholders.”

That’s the evidence. But even now, it’s frequently not the conviction of senior executives. Many still have it backward, believing safety and performance are antagonistic.

“Many business leaders have an implicit but unfounded belief that, while it is necessary to reduce workplace injury risk, there is a trade-off between profits and the expenditures necessary to keep workplaces safe,” George Washington University professor and former OSHA administrator David Michaels wrote just last year in the Harvard Business Review. “Companies can be successful and safe at the same time. The reality is that virtually all workplace injuries are preventable, and safety management and operational excellence are intimately linked.”

Maybe it’s because safety is such a visceral issue – lives and limbs – that our minds balk at connecting it with financial performance. Safety and stock price? No! It should be safety for its own sake, we’re inclined to think. It should stand alone, its importance self-evident. With good intentions, we keep it sequestered. When we say “Safety First,” we don’t mean, “This is the first step to tripling the stock price.” We mean, “Most important, let’s not get anyone hurt in the process.”

Perhaps because we’re naturally uneasy confusing the sounds of heartbeats and stock tickers, we resist asserting safety as O’Neill did, as the lead indicator of competent management and employee engagement, and the first promise a company should make to its workers. But given the evidence says that putting employees first is a brilliant business strategy, wouldn’t it make sense to start with employees’ most basic need?

A CEO who properly connects this foundational, compassionate concern to financial imperatives, disconsonant as it may feel, will not only make more money, but better integrate safety into the strategy of the company, protecting lives in the process.

That would make it a very good habit, indeed.

Originally published by Rod Wagner at Forbes online