Whatever it takes: Evidence on the trade-off between employee safety violations and product recalls

Abstract

We study the interplay between two critical types of safety violations within organizations: workplace safety and product safety violations. Our results show that firms make a trade-off between these negative behaviors, opting for higher product safety levels at the expense of employee safety. We also find evidence that cost cutting behaviors related to workplace safety are associated with a decrease in product recall incidents. The trade-off between employee safety and product safety is more pronounced when the firm has external performance pressure, fewer resources, customer-oriented leadership, or lower union involvement. This suggests that managers prioritize the interests of external stakeholders (i.e., customers) over those of their internal stakeholders (i.e., employees). Additionally, we find that this trade-off is consistent with firm value implications – product safety violations that receive media attention result in both short-run and long-run declines in stockholder returns. Finally, we examine the consequences of this trade-off behavior in terms of harm to employees, proxied for by the frequency of workplace injury and death.