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Can Collective Public Shame Drive Corporate Social Responsibility?

pollution-backing-prop-23It’s not quite the same as getting tarred and feathered, but given the viral social media possibilities in today’s connected world, new forms of what might be considered public shaming are being considered to help prod improved corporate social responsibility.

Of course, a nicer way to describe the theory is peer pressure. But the the tools are clear: Increased transparency and public ratings.

As Capital Ideas, a publication of the University of Chicago’s Booth School of Business, writes: “Companies often get rated on a broad range of nonfinancial measures, from corporate social-responsibility initiatives to investor-relations websites. As much as a company may want to ignore these outside ratings, especially if it receives poor grades, it can’t do so easily: investors, consumers, and employees pay attention to the ratings, too.”

The piece notes a seminal piece of research from 2010 by Duke’s Aaron K. Chatterji and Harvard’s Michael W. Toffel titled “How Firms Respond to Being Rated.” They tested how ratings systems, which help consumers and customers, might affect corporations:

“While many rating systems seek to help buyers overcome information asymmetries when making purchasing decisions, we investigate how these ratings also influence the companies being rated. We hypothesize that ratings are particularly likely to spur responses from firms that receive poor ratings, and especially those that face lower-cost opportunities to improve or that anticipate greater benefits from doing do.”

And it worked.

One conclusion from the study: “We find evidence that firms initially rated poorly subsequently improved their performance more than two groups of comparison firms: those that were never rated, and those that were initially rated favorably. We find that this main effect was driven by firms in industries that face significant environmental regulations and by firms that faced less costly opportunities to improve.”

Getting good data can often be challenging. The Guardian (UK) reported that “environment reports by some of the world’s biggest companies are routinely including wrong statistics and leaving out vital information, according to the most comprehensive study yet carried out. The examination of more than 4,000 corporate social responsibility (CSR) reports and company surveys by a team at Leeds University found “‘irrelevant data, unsubstantiated claims, gaps in data and inaccurate figures.'”

But what if more a companies’ peers get rated? Does a wider net of public transparency spur action?

For this, the Capital Ideas piece calls on a new report from Chicago Booth’s Amanda Sharkey and University of Utah’s Patricia Bromley titled “Can Ratings Have Indirect Effects? Evidence from the Organizational Response to Peers’ Environmental Ratings.” Capital Ideas notes that the authors ” used the environmental ratings of manufacturing firms, as well as data that firms are required to report to the government about their pollution levels, to track how the pollution levels of both rated and unrated firms changed as a function of having more rated peers.”

According to the study itself, “Organizations are increasingly subject to rating and ranking by third-party evaluators. Research in this area tends to emphasize the direct effects of ratings systems that occur when ratings give key audiences, such as consumers or investors, more information about a rated firm. Yet, ratings systems may also indirectly influence organizations when the collective presence of more rated peers alters the broader institutional and competitive milieu. Rated firms may be more responsive to ratings systems when surrounded by more rated peers, and ratings may generate diffuse or spillover effects even among unrated firms.”

The conclusion: “Results indicate that the presence of more rated peers is often associated with emissions reductions. This relationship varies, however, by whether a firm was rated, whether the rating was positive or negative (if rated), and, often, features of the competitive and regulatory environment.”

In other words, Capital Ideas writes: “Sharkey says that while third-party ratings can promote change and prompt self-policing, these types of evaluations seem to work most effectively when they operate in tandem with regulation and market forces, such as competition.”