We’ve certainly seen any number of examples of companies taking a big hit when sexual harassment of employees by key executives comes to light—sometimes someone even makes a pretty good movie about it. But what about your everyday non-CEO harasser? Does workplace sexual harassment affect the value of the company? Some might argue that it’s just a case of correlation, not causation, but in this study, the authors found that a high incidence of workplace sexual harassment has a powerful adverse impact on company value. Toxic culture, it turns out, matters when it comes to shareholder value.
In the study, the authors estimated the incidence of sexual harassment by analyzing crowd-sourced, typically anonymous, data from two major career intelligence websites—1.65 million online job reviews, published between 2011 and 2017, covering nearly 1,100 companies. Using that data, the study was able to consider the impact of a potentially larger number of incidents of harassment—including events that victims may have been unwilling to report publicly or even self-identify. The authors limited the sample to public companies with at least 200 published reviews to minimize the impact of outliers. For each company, the authors determined an “SH score,” an annual measure of the proportion of sexual harassment reports by company. To increase the chance of including in the classification only companies with a reliably high incidence of harassment, the authors considered a company to be a “high-SH company” if its SH score was in the 99th, 98th or 95th percentile of the yearly distribution. Although the authors recognized that individual reviews could be biased, they believed that, collectively, the crowd-sourced data should still be “informative” so long as the “biases do not vary systematically across firms and the sample is sufficiently large.” For verification, the authors also compared their data against several external measures and indices. The authors used stock returns over a one-year period as the main firm performance metric (rather than looking only at the short window after an event becomes public), as well as profitability and labor expenses as supplementary performance metrics.
The authors found that, for companies in any of three categories used to classify high-SH companies, stock performance declined over the following year, on an annualized basis, at levels ranging from –8.4% to –21.2%, during the sample period. The authors estimated these declines to reflect losses of annual shareholder value of $0.9 billion to $2.2 billion per “harassment-prone firm.” What’s more, they suggested that these estimated losses in market cap were likely to “understate the true extent of the damages from sexual harassment, to the extent that our SH score does not fully capture harassment at work.” Monthly stock prices declined for high-SH companies even after controlling for firm size, value, momentum, employee satisfaction, number of employees, profitability and industry. The authors concluded that their “evidence suggests that a hostile corporate social environment that tolerates sexual harassment has a large negative impact on firm value.”
To see the impact of sexual harassment on operating performance, the study used profitability ratios (return on assets or return on equity), finding that “high-SH firms exhibit a large decline in operating profitability over a four-year period.” The authors suggested that sexual harassment “can have costly consequences that include the attrition of talented employees and customers, and a decrease in creativity and quality of the decisions made by groups that include perpetrators and victimized employees…. In addition, there are large reputational costs to gender discrimination lawsuits and reduced employee morale….Operating profitability should reflect these consequences.” The study found that, high-SH firms’ ROA and ROE decline relative to their low-SH peers in the first year and after two years, “the difference in ROA or ROE between high and low-SH firms becomes statistically significant at the 5% level.” In addition to net profitability, the study also looked at labor costs, finding “that labor costs rise significantly after firms are identified as high-SH firms. These results supplement the stock performance evidence and suggest that sexual harassment harms firm value through lost productivity and higher costs.” The authors concluded that the evidence supported a conclusion that there was a “long-term deleterious association between sexual harassment and firms’ net profitability and labor costs, which helps to explain why high-SH firms suffer large negative stock returns.”