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Do Leveraged Firms Underinvest in Corporate Social Responsibility? Evidence from Health and Safety Programs in U.S. Firms

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Abstract

The explosion of health-related costs in U.S. firms over more than a decade is a huge concern for managers. The initiation of Health and Safety (H&S) programs at the firm level is an adequate Corporate Social Responsibility (CSR) initiative to contain this evolution. However, in spite of their documented efficiency, firms underinvest in those programs. This appears as a puzzle for health economists. In this paper, we uncover a strong negative relation of financial leverage to the implementation of H&S programs. The negative impact of debt on investment and CSR activities is generally interpreted as an efficient disciplinary effect of debt on managers. H&S are particularly well suited to revisit this evidence, given their strong profitability and homogeneity across firms. Very interestingly, the negative effect is stronger for firms with high free cash flows, for which debt is used to prevent overinvestment. This strongly suggests that debt, while disciplining managers, also discourages investments which are valuable both for firms and society.

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Notes

  1. The latter variable is captured by the H&S score granted by the extra-financial rating agency KLD.

  2. On the effectiveness of the OSHA, Weil (1996) shows that even moderate regulatory pressure (low probability of inspection and moderate penalties moderate) can induce a significant change in employers’ behavior.

  3. According to the American Industrial Hygiene Association, firms spend $170 billion a year on workers’ compensation associated with occupational illnesses and injuries (OSHA 2012).

  4. From 2000 to 2005, insurance premiums paid by firms increased by over 10 % per year (Gabel et al. 2005). In 2006, the average premium paid by an employer was $4,024 for single coverage and $10,880 for family coverage. As the next footnote reports, between 2005 and 2011, health coverage costs more than doubled in real terms, reaching more than 10 % of overall compensation costs.

  5. Chasan reports in the Wall Street Journal (CFO Journal, June 29, 2011) the results of various studies: “At U.S. companies with at least 1,000 employees, total healthcare costs [have reached] $11,176 per active employee in 2011, with workers paying about 24 % of the premiums”, according to an earlier study from consulting firm Towers Watson […] According to another survey (Financial Executive Research Foundation), 88 % of companies declare they are sharing health costs with employees. The same survey reports health costs making up more than 10 % of the overall compensation costs.

  6. Goetzel et al. (1998) documented that illnesses related to modifiable factors represent 25 % of employers’ healthcare expenses.

  7. Goetzel et al. (2004) provide a precise assessment of these benefits for ten diseases.

  8. The authors find on a large employer-level panel dataset from the universe of Maryland quarterly wage Reports that 42 % of workers were still employed by the same employer after 9 years in nonmanufacturing, 32 % in manufacturing.

  9. The Worldscope database is a major source of detailed financial statements data. It contains complete coverage of U.S. companies filing with the Securities Exchange Commission, with the exception of close end funds.

  10. The Boardex database contains biographical information of senior executives and board directors of firms around the word.

  11. Our results are unchanged when we replace the book value of total assets by its market value, which is obtained by adding the difference between the market and book value of equity to total assets.

  12. Our results are robust to the use of different time horizons to define labor mobility (e.g., the absolute value of the growth rate of the number of employees between t − 2 and t).

  13. The standard deviation of total debt to total assets is around 19 % in the global sample.

  14. For example, Aldana (2001) provided a review of return on investment studies of corporate H&S initiatives; as regards the impact on health costs, the review reports an average return of $3.48 for every dollar expended across seven studies; regarding absenteeism reduction, the ROI estimates for four studies range from $2.50 to $10.10.

  15. For example, Erfurt and Foote (1990) found that although half of employees indicated an interest in smoking and weight-loss classes, fewer than 1 % enrolled in the classes when offered offsite, compared with 8–12 % when offered onsite.

  16. For example, Serxner et al. (2004) observe that a $100 incentive is necessary to encourage the majority of employees to perform a health risk appraisal.

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Acknowledgments

We sincerely thank an anonymous referee, whose comments helped us to considerably improve the paper. We are very grateful to Clifford Holderness and Jeffrey Pontiff for their comments on a previous version of the paper, as well as to Dr Sylvaine Rocquelin for sharing her experience and thoughts on health issues in the workplace. We also thank Gérard Charreaux, Ghislain Deslandes, Arthur Petit-Romec, Michael Troege, Marti Subrahmanyan and François Xavier-Albouy for helpful discussions, as well as seminar participants at ESCP Europe, Technion University, Malakoff Médéric, MEDEC 2010, Indian Finance Conference 2012, International Conference on Governance 2013 and AFFI Conference 2014. This work has benefited from a financial support from the KPMG-ESCP Europe Chair in Governance, Strategy and Performance. All errors are ours.

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  1. ESCP Europe and Labex Refi, 79 avenue de la République, 75011, Paris, France

    Christophe Moussu & Steve Ohana

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  1. Christophe Moussu
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Correspondence to Steve Ohana.

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Moussu, C., Ohana, S. Do Leveraged Firms Underinvest in Corporate Social Responsibility? Evidence from Health and Safety Programs in U.S. Firms. J Bus Ethics 135, 715–729 (2016). https://doi.org/10.1007/s10551-014-2493-0

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