• Business and corruption

Business and corruption

This paper suggests that as national governments lose the ability to regulate activities of business, interest groups and concerned citizens are turning to private governance for its regulation. The rise of private governance has generated a demand for corporate social performance information and ratings to reduce information imbalances between firms and other stakeholders. Similar to credit rating agencies, social rating agencies have developed rating systems to assess organisation’ social and environmental performance. The authors view these ratings as forms of mandatory information disclosure by non-governmental agents. These ratings provide a way to benchmark and compare firms’ social performance. Mission-driven rating agencies also issue ratings to motivate firms to improve their social performance and even address broader societal problems.

The paper examines the effectiveness of these social ratings and how firms respond to the mandatory information disclosure. The authors argue that mandatory information disclosure programmes encourage positive responses from firms when:

• the disclosed information threatens to shame the firm and affect its legitimacy
• the cost of improving social performance is low.

The main policy implications suggested by this paper are:

• the organisations behind mandatory information disclosure programs might find greater success in achieving their objectives if they can devise incentives not only to “shame” enterprises but also help them to identify opportunities for low cost improvements
• if third party monitoring is to be successful in mitigating externalities these non government intermediaries’ ratings must be credible, salient and ultimately influence firm behaviour.
  

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