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.
180 Performance Measurement or Social Mediation?
Besides, social rating can lead to deep changes in actors’ representation:
the measures have a framing effect, highlighting the formerly vague concept of ‘social quality’; furthermore, through their information requests to stakeholders and managers, agencies have become mediators.
The rating tools are now common in financial actors’ cognitive frame- works and language, and thus social-rating tools have become legitimate in the financial communication arena. By adapting to the financial community’s cognitive framework, lending legitimacy to CSR for investors and structuring CSR decision-making, social-rating agencies play the role of ‘translator’ (Dejean et al., 2004), ensuring coordination among actors according to Callon’s framework (1998).
However, the process remains difficult: we have already outlined that it varies from one actor to another and its evaluation through different criteria may provide completely different appraisals for the same entity.
Social rating gives a single answer to multiple questions. The lack of clear and homogeneous assessment methodologies and their difficult implementation are leading to an evolution of this measurement tool;
either as a model for companies’ social performance diagnosis or as a focusing of the model towards mainstream investors.
The evolution of social rating practices
From a superficial and external evaluation to a deeper internal diagnosis Like any other companies, rating agencies meet profitability problems.
This is particularly the case in France, where the SRI sector is incipient and the revenues from investor-solicited rating are low. Some agencies have planned to use synergy between their know-how and the reaction of rated companies’ managers to develop a deeper diagnosis: the
‘corporate solicited rating’. The intention is to use their rating method- ology and criteria compared to sectorial benchmarks to produce an in- depth diagnosis of environmental and social performances within boundaries defined contractually with the company. This latter would give them access to inside information. The grade would then be a synthesis index but the diagnosis report would remain the most important output of this process.
This new kind of activity implicitly reveals the limits of the classical investor-solicited rating that does not provide an in-depth assess- ment of social performance. A corporate-solicited rating dealing with one business unit would require two to four analysts working for at least six weeks and a budget of €60,000 to €80,000. This would ensures an economically-viable model. Without any doubt, the
Françoise Quairel 181 results obtained would be more reliable than those of the investor- solicited rating, but the process would not solve the problems as to the eventual conflicting criteria, which correspond to stakeholders’
expectations.
The dangers involved in such an activity remain important: on one hand, since the evaluation is paid for by the company, the rating agency’s independence must comply with a strict code of deontology and stringent controls should be applied, as should be the case for financial auditing. Despite the agencies’ assertions, the line between rating and consultancy may be difficult to draw. Disclosure of results must be planned with the company, but the issue of the coexistence within the same sector of two kinds of ratings with different relevance remains unsolved.
The comparison with financial rating, paid for by the rated company as well, lacks relevance as this rating is mandatory for many bond issues on the financial market. A corporate-solicited social rating is a voluntary approach that aims to display the company’s concerns for social and environmental issues, for diagnosis and future improvements. We may also interpret such a move as a tool to gain or improve the firm’s reputation, especially to attract SRI investors. The analysis independence could be threatened by the demand for legitimacy, which the company is hoping for and expecting.
The focus on the mainstream investment community
Another major evolution is the change in the agencies’ evaluation criteria that has become more focused on the financial impacts of companies’ social behaviour. Agencies and other rating bodies seek to promote the raised awareness of financial analysts and funds managers towards financial risks related to non-sustainable behaviour in order to encourage them to integrate sustainability criteria in their evaluation process. They modify their assessment model according to the investor’s objectives, especially by reinforcing the integration of risk and intellectual capital into the assessment criteria. Consequently, they reduce the ambiguity of the evaluation that is more clearly targeted to shareholders’ expectations. This is the case, in particular, for the evaluation of corporate governance and risk-management performance. Standard and Poor’s propose ratings in corporate governance practices, that is evaluation of the interactions between a company’s management, its board of directors and its financial stake- holders (shareholders and creditors). This is to assess the extent to which companies’ corporate-governance policies and practices serve
182 Performance Measurement or Social Mediation?
the interests of their shareholders. Disclosure and transparency are among the main evaluation criteria. Core ratings have developed an evaluation model answering the question as to:8 ‘how well the board of directors have responded to, and are managing and reporting on, those risks which are potentially material to the value of the company’s equity and bonds’. It specifically takes an investor’s view of the potential impact of risks on value, because investors are the primary stakeholder group for companies. The key criteria in Innovest’s assessment model are focused on intangible value-drivers; environmental, social and governance performance are used as leading indicators for management quality and long-term financial performance.
The ambiguity caused by the multiple stakeholders involved is thus partly cleared: extra-financial ratings assess management’s ability to control risks and therefore to increase the financial value of the company according to the classical financial theories, but in the process they extend the fields of their investigation to the risks and opportunities linked with social, environmental and ethical aspects as well as corporate governance.
Conclusion
The obvious function of social rating is to measure corporate social performance in order to provide information for fund managers; it aims to transpose the financial-rating concept to the social domain. But a comparative analysis of both kinds of ratings reveals that this transposition is more symbolic than sound. We highlight two principal reasons hindering the functional use of social performance measurement; one is the ‘black-box’ model of its design due to the lack of reliable social information and the lack of transparent and homogeneous assessment methodologies, and the other, above all, lies in the multiple assessment criteria, depending on various, even conflicting stakeholders’ interests, which cannot lead to a single relevant rating.
However, social rating plays a central role in defining and implementing CSR. It influences corporate managers’ behaviour by enlarging perform- ance fields to new areas. This social-performance measurement sets up an important cognitive framework for the actors within the organiza- tional fields. Social-rating agencies play the role of ‘translator’ (Dejean et al., 2004), and social rating is an important enabler for the ongoing CSR institutionalization process (Di Maggio and Powell, 1983). It provides CSR legitimacy among the largest listed companies and strives to add new dimensions to the internal diagnosis process, dealing especially
Françoise Quairel 183 with risk-management. By focusing its criteria on the mainstream investors, social rating could evolve into an improvement in their performance-measurement process. So, its implementation has led these financial-origin instruments back towards their initial users; but, creating a standard performance measurement relevant to all stake- holders continues to be like trying to force a square block into a round hole.
Notes
1 ‘Le socialement correct (é)talonne les entreprises’, Le Monde, 27 novembre 2001.
2 The most famous agencies or social rating organizations are: KLD, Innovest, Council of Economic Priorities (CEP) in the USA; PIRC and EIRIS in the UK;
Centre Info and SAM in Switzerland; Ethibel in Belgium; Vigeo in France;
Avanzi in Italy; and others.
3 At the end of 2004, 17 families of sustainability indices were counted; among the most famous are the Dow Jones Sustainable Index, the FTES4Good, and the ASPI Eurozone.
4 Novethic, Lettre de l’économie responsable, november 2002.
5 For further details see M. Capron and F. Quairel-Lanoizelée, Mythes et réalités de l’entreprise responsable (Paris: La Découverte, 2004).
6 Plan – Do – Check – Act are the well-known total quality management steps (Deming cycle).
7 CIES: The ‘Comité Intersyndical pour l’Epargne Salariale’ is a committee composed of the four main French unions that aim to define criteria for selecting funds suitable to invest employee’s savings; it has identified funds that comply with these criteria.
8 www.coreratings.com
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