Sexual harassment linked to declines in profitability

Employers with higher ‘scores’ see lower future stock returns: study
By Sarah Dobson
|Canadian HR Reporter|Last Updated: 10/10/2019
Google has promised to overhaul its sexual misconduct policies after employee protests over its treatment of executives accused of sexual harassment. Credit: Uladzik Kryhin (Shutterstock)

While the negative impacts of sexual harassment have become well known in recent years — ranging from lower productivity and morale to increased legal costs and absenteeism — establishing a direct connection to the bottom line should provide further impetus for employers to act.

That’s according to a recent study that found firms in the United States with greater incidence of sexual harassment see lower future stock returns.

In looking at the years 2011 to 2017, the Canadian researchers found that employers with higher “scores” of sexual harassment saw an annual shareholder value loss ranging from US$1 billion to $2.4 billion.

They also found these companies were associated with sharp declines in operating profitability and increases in labour costs.

“We wanted to show that if you were a CEO of a firm, and you were just a profit-maximizing son of a bitch, would you care about this? So, we basically wanted to show to those people that ‘Yes, you should care about this, because allowing this rot in your company means that it’s going to hurt you, in terms of stock returns, profitability and labour expenses — it’s very expensive, very costly to allow this stuff to continue,’” says Shiu-Yik Au, assistant professor in the Asper School of Business at the University of Manitoba in Winnipeg and co-author of the study Me Too: Does Workplace Sexual Harassment Hurt Firm Value?

“Respecting people and making money go hand in hand — this is not something where it’s in opposition. It’s not a cost centre; it’s an investment into your company’s future.”

If there’s any takeaway from the #MeToo movement, it’s that sexual harassment is pervasive — much more than was initially thought, says Andréanne Tremblay, assistant professor in the department of finance, insurance and real estate at Université Laval in Quebec, and co-author of the study.

“It seems intuitive that firms would do a lot of things to prevent it, but... some firms are somehow doing half-hearted attempts to prevent it, either because they don’t think sexual harassment is pervasive or because they think it’s too costly… so this is our attempt to show pure economics [and] economically motivate these people to say, ‘Sexual harassment has some very significant consequences, economically speaking, and, therefore, that’s yet another reason why you should prevent it.’”

Background 

The researchers searched the anonymous comments of employer review sites Indeed and Glassdoor for words such as “sex,” “sexual,” “abuse,” “assault,” “misbehaviour,” “harass” and “harassment.” Examples included “The store has a lax policy for sexual harassment and disrespectful management” or “I quit due to sexual harassment and discrimination from my branch manager that was not dealt with after multiple complaints.”

The final sample involved 1.65 million reviews, covering about 1,100 firms. The researchers counted the number of times these comments appeared in company reviews over the course of the year, divided that by the total number of reviews and then turned that into a percentage to figure out which of the companies had the most harassment, says Au.

“We were then able to sort them into really bad sexual harassers and people who probably aren’t that bad or have no reports of sexual harassment. After dividing those people into those groups, we were basically able to do some portfolio analysis where we take these bad companies or the high sexual harassment firms and put them into one portfolio and normal firms or regular firms into another portfolio. And then we compare the returns over time,” he says.

“If you look at the normal portfolio, it does great; it earns like 30- or 40-per-cent returns. It’s very impressive. If you look at the high sexual harassment firms, basically, it doesn’t even go up — it actually falls by about 10 to 20 per cent over the course of that period. So, we’re talking about a large gap.”

Stock returns are affected by a variety of known factors or characteristics, such as company size, whether it’s a growth company or a value company, speed of growth and types of profitability, says Au. 

“Even after controlling for all those known characteristics that affect stock returns, this effect still remains in a large, substantial basis. Most of our calculations are showing roughly a 20-per-cent decline in firm value after we control for all the risk factors.”

The researchers controlled for a lot of factors, says Tremblay.

“For example, we control for past profitability, we control for employee satisfaction, for employee treatment, unionization, the age of the firm, the size of the firm, and so on… And the stock return performance of the worst offenders still remains significantly lower than the rest of the firms.”

‘Culture of permissiveness’

The issue is not necessarily how much harassment an employer has but how it is dealt with, says Au.

“There seems to be some sort of culture of permissiveness or a culture of denying sexual harassment. And that lets the rot spread,” he says. “It’s not about one or two people [who are] really causing the issue; it’s the fact that these individuals are all over the company and people aren’t helping them. And then, on top of that, the sexual harassers learn that they can actually continue on the behaviours and that spreads throughout the company and causes them a lot of problems.”

The results speak very loudly to CEOs or other people who are more numbers-driven, says Tremblay.

“People might say, ‘Well, yeah, it would be nice, but the cost benefit trade-off is not worthwhile for our firms; we have to respond to our shareholders.’ But… if we do crunch the numbers, actually, these issues, they are important, not only for the profitability or the numbers, per se, or the market capitalization, the stock returns, but also because your productivity, your negative consequences, they do have an impact. So, it’s really just quantifying this impact. Because, too often, people are ignored or shuffled away… it’s not properly dealt with.”

The study should also help HR and management when it comes to building a business case for greater investment in preventing harassment, she says.

“You cannot ignore it, basically. If, until now, you’ve ignored it for whatever reason — because the arguments about the negative consequences were not compelling enough — then the economic argument, I think, is yet another view to make the point or make the case that investing in prevention is important.”

Having this kind of research can help with the cause, according to Ryan Wozniak, senior vice president of legal and operations at Peninsula Employment Services in Toronto.

“In the business context, a positive financial outcome is always a good motivator and tends to trigger change and adaptation,” he says. “If you operate a business that makes a concerted and proactive effort to stamp out workplace harassment and foster a culture of productivity and employee harmony, you are very likely to experience — in the long run — financial benefits as a result of that, in the form of less or lower direct costs, in the form of legal fees and absence and employee attrition costs, and probably better brand recognition and better brand power.”

Most businesses treat workplace harassment as a serious issue that has to be proactively tackled, and that has a direct financial benefit in the long run, says Wozniak.

“It fosters a culture of productivity and collaboration and employee harmony,” he says. “And that’s very important, especially in larger businesses where you have teams working together, teams working on large projects across different divisions — it’s very important that people are able to collaborate, are able to get along and able to work comfortably and peacefully. And, it also helps you keep top performers and helps you keep good employees. Nobody wants to work in an environment that’s toxic or plagued by belligerence or harassment or bullying.”

Long list of consequences

Other costs of harassment include legal claims — such as compensable claims for chronic mental stress or for intentional infliction of mental distress, says Wozniak.

“When you’re hit with a legal claim, there’s obviously the direct costs you incur by way of legal fees and legal representation — if that’s what you require — as well as the additional cost that may come in the form of a judgment or fine or remedial order.”

Then there are employee absences that may involve workers’ compensation claims or lost-time injury claims, along with disrupted service levels or temporary staffing costs, he says.

“[There are some] individuals who may claim, for example, constructive dismissal because of an untenable workplace might pursue a civil claim on the basis that they’ve been harassed to the point of their existing work relationship not being tenable.”

Another issue involves the Health and Safety Act in Ontario, says Wozniak, which says an employer that fails to investigate or conduct a reasonable investigation of an incident of workplace harassment can be required to hire a third-party investigator at its own cost.

Aside from having policies to address incidents of harassment — including a process for investigating and adjudicating and, if necessary, taking disciplinary action — there should be various training platforms, both under applicable health and safety legislation and provincial legislation, but also within their own cultures and work environments, he says.

“By promulgating a culture of confidentiality, of disclosure and of proactivity, employees, in turn, trust their employer, and that open communication channel will then allow the business to, in the long run, go a long way to eliminating or greatly reducing the amount of workplace harassment that occurs.”

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