Shamed and Able
Title: Shamed and Able: How Firms Respond to Information Disclosure
Authors: Aaron “Ronnie” Chatterji ([email protected]) and Michael W. Toffel ([email protected])
Publisher: Harvard Business School, Working Paper No. 08-025
Social rating agencies such as Calvert and KLD Research & Analytics assess the social, environmental, and governance perfor-mance of organizations against a set of high-minded standards. These ratings cover all publicly traded companies and are increasingly popular among large and small investors who believe that a company’s ethics and sense of global responsibility are as important as how much money it makes. But does such third-party monitoring encourage companies to act responsibly? The authors of this paper analyzed how firms responded to the disclosure of annual company ratings for poor environmental performance by KLD between 1999 and 2003. These ratings were compared with subsequent toxic chemical emissions data that firms are required by law to report to the U.S. Environmental Protection Agency.
The authors found that companies that were rated as polluters improved their environmental performance by reducing their emissions by an average of 27 percent below those of firms that were never rated. They also found that companies are more likely to clean up their act if they are both “shamed” by the release of negative information and “able to respond” because they know that they can easily rectify inefficient industrial processes.
Bottom Line: Social rating agencies can be quite effective in improving social and ethical standards of companies, particularly when these agencies identify low-cost ways to improve performance.
Des Dearlove ([email protected]) is a business writer based in the U.K. He is the author of a number of management books and a regular contributor to
strategy+business and The (London) Times.
Stuart Crainer ([email protected]) is a business writer based in the U.K. and a regular contributor to strategy+business. He and Des Dearlove founded Suntop Media, a publishing and training company providing business content for online and print publications.