Responsible Investors and Company Standards: Follow the Money to Rate the Raters
Forthcoming in Deborah C. Poff and Alex C. Michalos (eds.)‚ Encyclopedia of Business and Professional Ethics‘ Springer: Heidelberg
23 Pages Posted: 12 Sep 2017
Date Written: June 22, 2017
Abstract
Responsible investors require unbiased information on the outcomes of corporations’ social responsibility (CSR) activities to direct (withdraw) their capital towards those entities with positive (negative) impact. Companies, however, have clear incentives to manufacture a positive tilt into any CSR information they release. Third party entities therefore launch corporate standards to reduce that tilt and mitigate any potential bias. Companies react to these initiatives by offering significant funding to these third parties, whereby they create a context of corporate capture in which some third party executives may act entrenched to the corporations instead of aligned with their original mission. To navigate this complex web of information asymmetries, external buy-side rating agencies offer supposedly unbiased views to responsible investors. In this context, we aim to inform the research questions: how good are these rating agencies? And how dependent is their existence on corporate cash flows?
Keywords: corporate capture, corporate social responsibility, information asymmetries, rating agencies
JEL Classification: D82, G32, M14, O35
Suggested Citation: Suggested Citation