Signaling without Certification: The Critical Role of Civil Society Scrutiny

Abstract

In response to stakeholders’ growing concerns, firms are joining self-regulatory environmental programs to signal their superior environmental management capabilities. In contrast to the literature’s focus on programs featuring third-party certification, we theorize that programs lacking certification can nonetheless sometimes serve as credible signals by instead promoting civil society scrutiny, thus mitigating adverse selection. We hypothesize that (a) institutional environments that support civil society scrutiny and (b) organizational characteristics that increase the impact of that scrutiny enhance the credibility of the signal by making participation more costly for firms with inferior capabilities. Our theory is supported by examining the decisions by 2,604 firms in 44 countries whether to participate in the United Nations Global Compact.