As companies look to get ahead, many are submitting to ratings systems that pit them against one another to track results. In the corporate world this means anything from their environmental impact to how they treat employees to volunteer activities is available for their peers and the public to see. And while most would expect ranked companies to want to succeed, there’s little research on whether their behavior changes when they are unranked and simply snooping on the results of their peers.
Chicago Booth’s Amanda Sharkey and the University of Utah’s Patricia Bromley looked at the indirect effects of powerful environmental rankings and paid special attention to how excluded manufacturing firms reacted as more of their peer companies are ranked on their ability to lower toxic emissions. Surprisingly, even companies that were not ranked can be influenced just by being surrounded by firms that are rated, Sharkey says. However, this only occurs in certain settings. Along with their rated peers, “unrated firms in highly-regulated environments reduce their emissions,” says Sharkey. Unrated firms in less regulated environments did not change their behavior as a function of rated peers.
The professors looked at environmental emission data ratings by a third-party group to see how firms that are not being studied handled emissions. Environmental ratings piqued the researcher’s curiosity because incentivizing firms to lower emissions has such a huge impact on the environment, she said.
The threat of being ranked in the future is only one of the reasons unrated firms might change their behavior. Ratings might also enable firms to better learn from one another. But despite the increased policing by peers and some evidence of wide-reaching results, Sharkey says it’s not the case that these types of rankings are more effective than other drivers of organizational improvements—such as government initiatives or competition. It’s a mistake to use privately conducted ratings as “a substitute for government regulation,” she said. “Our results show they tend to have a bigger effect on unrated firms when they occur together.”
Amanda J. Sharkey and Patricia Bromley, “Can Ratings Have Indirect Effects?: Evidence from the Organizational Response to Peers’ Environmental Ratings,” American Sociological Review, forthcoming.