Companies Respond to Public Shaming – If Costs Are Low
Public ratings of firms has been carried out for well over a century now, but how firms respond to many such rankings is a relatively under-researched question. In a new Harvard Business School working paper, “Shamed and Able: How Firms Respond to Being Rated.”* Aaron K. Chatterji and Michael W. Toffel find support for their hypothesis that “ratings are particularly likely to spur responses from firms whose legitimacy is threatened—and thus are shamed—by these ratings.”
The authors examined environmental ratings from KLD Research & Analytics, Inc. (KLD), the largest multidimensional CSP [corporate social performance] database available to the public.’
Because the authors were concerned with how the firms responded to their initial poor ranking — as opposed to a change in ranking — they looked at “firms that were first rated due to KLD’s expansion to firms that were never rated by KLD during
our sample period. ”
Looking at the years 1999-2004, they examine 653 companies and find mixed results. While many companies do indeed change their environmental policies in response to poor rankings, “in contrast to [the author's] predictions, it is quite plausible that in some circumstances, poor ratings will not stimulate improvement but rather will lead to organizational decline.”
We find that those firms that are “shamed” by a poor KLD rating and most “able” to seize low hanging fruit show the most improvements in environmental performance.
The researchers believe the evidence supports their theories, and “hope” that their “work is part of a nascent literature that helps identify the conditions under which company ratings are most likely to achieve their goals.”
The authors say their research highlights an opportunity for policy makers to partner with other stakeholder groups, where the government uses its coercive power to gather data while these groups focus on communicating the data to the public.
“There are several examples of non-governmental entities already doing this without much involvement from the government. For example, while the US EPA requires tens of thousands of facilities to disclose their toxic emissions of over 600 chemicals every year, the agency’s TRI data languishes on two fairly obscure EPA websites.
To make this data more visible and useful, Environmental Defense and The Right-to-Know Network each created user-friendly web portals (www.scorecard.org) and www.rtknet.org), a team of academics created a Google Map mashup of this data (www.mapecos.org 
, and the Investor Responsibility Research Center aggregated this factory-level data to their parent companies to create the CEPD.”
In this spirit, Wikinomics author Anthony Williams foresees a future where non-governmental organizations and other sectors create user-friendly web portals to aggregate data from government and other sources to create and distribute information of public value.
For an example of what a leader in this area is doing, check out Intel’s (NASDAQ: INTC), 2007 Corporate Responsibiltiy Report. The 100-page report provides detailed information and ratings on metrics related to Business/Workplace, Environment, Education and Community. While Intel met or partially met its objectives in the vast majority of areas, the company still faces challenges in certain areas, including reducing water use and auditing suppliers for compliance with the Electronic Industry Code of Conduct.
*Shamed and Able: How Firms Respond to Being Rated. By AARON K. CHATTERJI; Duke University and MICHAEL W. TOFFEL; Harvard Business School.
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