Sustainability ratings and corporate control: Debacle of shareholder over stakeholder theory

Abstract

Corporate sustainability rating is frequently observed by different stakeholders, thereby finding interest in academic studies as well. Shareholders of sustainable-companies respond to different types of stock market news, be it financial or non-financial news. Announcements relating to ratings obtained by sustainability-compliant businesses appear to create anticipation in the mind of the investor. If these announcements are viewed by investors with interest, then it can have a greater implication for corporate governance and control and the corporate leaders can find a clear path to resolve the much debated “shareholder” versus “stakeholder” view in decision-making. This paper aims to explain whether or not the declaration of sustainability ratings contributes to the stock market reaction in emerging markets such as India. Short-run event analysis was carried out on a set of selected BSE listed companies following sustainable practice (2017-2019) and the entire data set was split into categories of the upgrade, downgrade, no change, and no ratings. The study results show that the announcement of sustainability ratings is not regarded by investors with a great deal of interest and there is inherent indifference to such news in the stock market. These findings are relevant for stock exchanges, investors, and corporate control as it raises a serious issue of rethinking stakeholder awareness levels, which in an emerging economy such as India currently seem to be in a nascent stage. In order to meet the stakeholders interested in the process of business becoming sustainable corporate leaders through proper governance should explore ways and means to approach sustainability in a more systematic way