An interesting new paper was just released by Aaron Chatterji and Michael Toffel entitled “How Firms Respond to Being Rated”.   The paper looks at ratings applied by independent firms to companies regarding their performance in responding to environmental concerns.   The basic focus of the paper is to assess whether ratings by independent firms or organizations recommending for or against investing in companies based on their environmental records actually has any impact on how those companies address environmental issues.  In other words, does public exposure or “shame”, to use the words of the authors, have any impact on how responsive to environmental concerns companies are?

This is an interesting question that is raised frequently in the context of whether industry responsibility and oversight models (i.e., various forms of industry “self-regulation”, a term I do not like and do not think fits well with the purpose of these models) work to ensure accountability and adherence to agreed upon industry best practices.   In the context of privacy policy, for example, this issue is one of the key questions under discussion. 

Interestingly, a couple of years back during the debate on net neutrality, I made the argument that industry leadership through some form of oversight/self-regulatory model, coupled with competition and the extensive oversight provided by literally hundreds of thousands of sophisticated online users would help ensure effective enforcement of good practices and protect consumers.  Tim Wu at the time offered the following comment in an interview with the Economist (this is an excerpt from the article in the Economist):

"'The public reaction has already been as powerful and effective as any law,' says Timothy Wu, a professor at Columbia Law School who is credited with coining the term "net neutrality". The debate has put the telecoms companies on notice that they are being watched closely, he says, and has forced them to make public pledges not to block or degrade access. 'Shame can have more power than litigation,' says Mr Wu. 'The market and consumers can control bad practices, but consumers actually have to be aware of what is going on for that to happen'."

The Chatterji and Toffel paper does indeed find that publicly citing companies for their performance, or measuring and publicly publishing how they perform on various standards does have an impact on how companies act.   Letting the public and policy makers know, in other words, how a company complies with its commitments or industry principles is a useful tool to encourage compliance.  As the authors note:

We hypothesize that company ratings are particularly likely to spur responses by firms that receive poor ratings, especially those that face lower cost opportunities to improve and that operate in highly regulated industries. . . We find empirical support for our hypotheses, and present implications for managers of rated

companies and of private and public rating agencies. While negative ratings may “shame” firms that are performing poorly, the threat of regulatory action and the presence of “low hanging fruit” are important drivers of how firms respond to information-based incentives.

Admittedly, the paper does suggest that the threat government might step in is a spur to action but I don’t think this undermines the model.  In fact, it seems to me that industry responsibility and oversight models can only work well if all parties know that government remains watchful and might need to intervene if the process clearly appears off track.   Most of the research I am familiar with in this area – like this paper from Phil Weiser of the University of Colorado – makes the same point.  Overall, I believe this paper adds to the growing body of knowledge about how to make industry responsibility and oversight models work.  Clearly transparency and public notice are key tools in this regard.