174 Performance Measurement or Social Mediation?
limits of the rating as a representation of social performance. We intend to highlight, in a second section, the political and social function of this device: it plays a central role in influencing corporate managers’
behaviour and its stakeholder relationships but this role is above all a symbolic one.
Françoise Quairel 175 correlation has been shown between CSP and financial performance (Griffin and Mahon, 1997), the rating agencies are striving to highlight the financial out-performance of the SRI indices in comparison with their benchmark indices.
Promoters of social rating refer to the financial rating agencies and attempt to induce a semantic ambiguity to gain the symbolic power attached to credit rating. However, to understand the implications of this semantic capture, we must remember the key characteristics of a credit rating: born during the nineteenth century, it aims at assessing a company’s capacity to repay its debts. It measures the default proba- bility of borrowers and their ability to repay fully and in a timely manner financial debt obligations. It gives a formal evaluation based on a standard rating scale (from AAA to D) that provides lenders comparable information on credit risk and leads them to decide whether to approve a loan. This rating is related to bond issues and it is mandatory for certain international or specific kinds of bonds.
The grades are based on in-depth sectorial, strategic and financial analysis including legal and organizational aspects of the firm to answer a single question: has the company the ability to repay its debts? A higher credit rating leads to a lower interest rate and consequently to a more favourable issuer’s image. It influences the conditions of access to the financial market and, hence, is often solicited and, paid for by the companies. The rating process is based on public economic and financial information and also on confidential documentation and personal inter- views within the firm’s managers; the grade is fixed by a committee including senior analysts; it is published, revised and monitored on an ongoing basis. Consequently, it is possible to affirm that financial rating is a mature tool. This analysis leads us to identity some key char- acteristics: credit rating has a clear function which is focused on precise users, based on well-defined criteria, ex post validation. Moreover, it is a tool that strongly influences investor behaviour and confers a large power on the three major rating agencies (Standard and Poor’s, Moody’s and Fitch). The self-predictable character of the default provision reinforces this power. Despite numerous criticisms, credit rating is widely institu- tionalized within the financial community.
The transposition of credit rating for social rating is more symbolic than sound. At a first glance, the semantic capture leads one to assign credit-rating attributes to social rating, but this doesn’t stand up to serious analysis (see Table 10.1). We already notice that both ratings are management instruments reducing complexity and simplifying reality in order to provide financial actors and assets managers, who
176 Performance Measurement or Social Mediation?
have neither the time nor the expertise to appraise corporate social or financial performances, with decision-making tools. But social rating is difficult to validate since it implies answering multiple questions targeting different kinds of stakeholders’ expectations: the difficulty is in choosing between simplification and relevance. The different, even conflicting objectives of stakeholders, the multiple performance areas and the lack of reliable information dilutes evaluation. Rating becomes a malleable instrument, which strongly depends on the Corporate Social Responsibility definition of its creators. It does not allow any provi- sions on social or environmental forthcoming practices of the firm, and therefore cannot fulfil its function in assisting SRI fund managers’
decision-making.
A symbolic interpretation model
The concept of performance is related to attaining one’s objectives; it depends on context, subject and actors. Its assessment lies in the tools that represent its measurement and on the subsequent interpretations. It is Table 10.1 Comparison between credit and social rating
Credit rating Social rating
Management tool Summary of the reality Summary of the reality Question Only one: has the
company the ability to repay its debts fully and on time?
Unclear question: is the company socially and environmentally responsible?
Agencies customers
Lenders and by extension investors; the companies pay for it
SRI funds managers and multiples stakeholders; the funds managers or companies pay for it
Information Financial and economic, public and confidential, rather reliable
Lack of reliable sustainable reporting
Underlying model Financial analysis and macro-economic analysis recognized worldwide
Lack of a ground analysis model;
emerging methods with a strong cultural influence
Functional value Maturity stage of the proven; predictable function
No demonstrated correlation between social and financial performances and no anticipation of future social performance
Françoise Quairel 177 therefore necessary to analyse the interactions within the social-rating design process between its users, its creators and the various instruments involved in its construction.
Practices and ratings criteria differ slightly from one organization to another, and assessment results depend on the organizations that have carried it out. The agencies ‘don’t speak in one voice?’4 and their obvious differences make appraisals difficult to compare and lead to a certain lack of credibility as to their value.
The methodologies5 used differ mainly on two levels: inclusion or exclusion of sectors, and criteria used. The methods imply different steps and for each of these steps the concept of CSR leads to different choices:
• Step 1: Segmentation of the performance fields which are supposed to correspond to the main stakeholders – environment, customers, suppliers, shareholders, (corporate governance), internal social policy (employment, working conditions), external social policy (human rights, local community, sponsorship and so on).
• Step 2: Choice within each field of the indicators; the largest agencies inform on 300 to 500 points within the different fields mentioned above.
• Step 3: Assessment of the indicators according to the criteria answering the stakeholders’ expectations (or some of them). These criteria usually assess the commitment of the proposed policies, their implementation and their results (according to PDCA)6 and a final assessment compared to a sectorial benchmark.
• Step 4: The weighting of the items, of the sub-domains or even the domains themselves. How to combine good results in one sub-domain and poor ones in another?
Even if the evaluated fields are quite similar, the criteria for each rating agency reflect in its assessments the socio-cultural concerns of the country concerned and the underlying concept of CSR for each organization:
What is the image of a good performance in a social and environmental field? These criteria also depend on the nature of the rating organizations’
founders: some are tightly linked to investing organizations, others are closer to NGOs (CEP) or trade unions (PIRC), while others are created in gathering companies, European unions and financial organizations (Vigeo). Those in the first category try to assert competence and objec- tivity as well as their close connections to investors; the second category means to express the expectations of civil society and the third tries to
178 Performance Measurement or Social Mediation?
establish a dialogue between parties whose concerns differ widely in principle.
The various steps of the rating process are but a normative choice by which performance representation is constructed and a rating given.
Methodology can sometimes be more qualitative: assessments then result from a ‘committee’ of experts representing the stakeholders, and assessing the data produced by the analysts (Ethibel). If qualitative approaches seem preferable the choice could be detrimental to replica- bility and opposability as well as the transparency desired by investors and companies.
For investors soliciting rating – the usual rating – most information is obtained from external sources such as the media, the financial press and public organizations. Most rating agencies do their best to validate the information with more confidential sources such as trade unions and NGOs or other third parties. They strive to complete the information gathered by either interviewing managers or sending questionnaires directly to the companies that are evaluated. It must be noted that most information the rating agencies work with is provided by the companies themselves. The poor level of the information gathered limits the quality and the reliability of the ratings assigned by the agencies. Due to their low revenues, they are undermanned which leads to superficial research and analysis of information. The ratio between the number of rated companies and staff involved (number of employees) is quite revealing as to the depth and quality of the data used; it is quite tempting for rating agencies to only retain the most easily available information. The lack of reliability of the information sources, the difficulties of their auditing in the global context, the hefty cost in obtaining such data, plus the lack of knowledge on the various cultures involved are deeply detrimental to the given grades’ credibility.
These shortcomings may be due to the fact that this activity remains in the first stage of implementation. An ongoing learning process will allow improvements in gathering data, even more so if the societal reporting is standardized. But, faced with the complexity of the different fields taken into account and with the conflicting expectations on the part of the various stakeholders, the question is raised as to relevance of only one performance model: can conflicting views lead to a universal consensus? Isn’t this a mission impossible?
The tailormade approach delivered by a rating organization, that reflects investor own values and concerns within a contractual framework, where the customer clearly defines his requirements, cannot be disputed.
But the impact of the rating may be questioned when the organizations
Françoise Quairel 179 have their own policy: definition of criteria and weighting are imposed and tend to appear as universal without the clients knowing how these are comprised; they must accept the organization’s choices. A certain image of the rated company is given depending on the agency’s under- lying CSR concepts without any further questioning.