Person:

Toffel, Michael

We examine how firms respond to third-party ratings of their corporate environmental activities. Using insights from institutional theory, we hypothesize that ratings are particularly likely to spur responses from firms whose legitimacy is threatened and thus are shamed by these ratings. We extend existing theory by drawing on the strategic choice perspective to hypothesize that the greatest performance improvements will be exhibited by those shamed firms that face lower-cost opportunities to improve and thus are particularly able to respond. We tike advantage of a natural experiment, when a major social rating agency expanded the scope of its ratings, to empirically test these hypotheses in the context of environmental ratings and environmental performance of more than 650 firms in the United States. We find empirical evidence that supports our hypotheses, and present implications for theory and public policy.

Ratings of corporations' environmental activities and capabilities influence billions of dollars of "socially responsible" investments as well as some consumers, activists, and potential employees. In one of the first studies to assess these ratings, we examine how well the most widely used ratings those of Kinder, Lydenberg, Domini Research & Analytics (KLD) provide transparency about past and likely future environmental performance. We find KLD "concern" ratings to be fairly good summaries of past environmental performance. In addition, firms with more KLD concerns have slightly, but statistically significantly, more pollution and regulatory compliance violations in later years. KLD environmental strengths, in contrast, do not accurately predict pollution levels or compliance violations. Moreover, we find evidence that KLD's ratings are not optimally using publicly available data. We discuss the implications of our findings for advocates and opponents of corporate social responsibility as well as for studies that relate social responsibility ratings to financial performance.

As regulators increasingly embrace cooperative approaches to governance, voluntary public-private partnerships and self-regulation programs have proliferated. However, because few have been subjected to robust evaluation, little is known about whether these innovative approaches are achieving their objectives and enhancing regulatory effectiveness. In the context of a federal government program that encourages companies to voluntarily self-police and self-disclose regulatory violations, we examine how participation affects the behaviors of regulators and regulated facilities. We find that on average, facilities that committed to seif-police experienced a decline in abnormal events resulting in toxic pollution, and that regulators reduced their scrutiny over self-policing facilities. Upon closer examination, we find strong evidence of these effects among facilities with clean past compliance records, but find no such evidence of among facilities with more problematic compliance histories. These findings support the theoretical promise of meaningful self-policing practices and suggest that voluntary disclosure can serve as a reliable signal of future compliance but only among a subset of facilities.

SA 8000, along with other types of certification standards and corporate codes of conduct, represents a new form of private governance of working conditions, initiated and implemented by companies, labor unions, and non-governmental activist groups.

Whether these codes represents a substantive or merely symbolic approach to governing working conditions is the subject of an ongoing debate, which to date has been dominated by philosophical and political discourse due to a lack of systematic evaluation. Very little empirical evidence is available to indicate whether these codes legitimately distinguish adopting companies and factories as providing better working environments (e.g., health and safety, freedom of association, fair pay practices) and whether these codes have affected their business outcomes (e.g., staff turnover and absenteeism, product defect rates, sales growth). In this book chapter, we review the existing evaluations of other private codes governing workplace conditions, including the Ethical Trading Initiative's Base Code, Nike's code of conduct, and Fair Trade. We then describe several key elements of program evaluation that are becoming standard practice in other domains, which we believe should be incorporated in future evaluation studies of these codes. We emphasize the importance of examining performance over time, comparing adopters to non-adopters, and incorporating strategies to overcome selection bias. Evaluations that meet the highest methodological standards are critical to inform the debates about this new form of private governance, and to highlight opportunities for improvement in their standards and monitoring procedures.