Sustainability Ratings and Organizational Legitimacy: The Role of Compensating Tactics

Abstract

This chapter develops theory concerning how ratings of firms’ business practices are likely to affect firm behavior. More specifically, we draw from established theory on cognitive choice models to posit that sustainability ratings systems may be more likely to promote improved social and environmental performance in non-core practices than in core practices. This improved performance constitutes a form of compensating tactics, as ratings agencies’ analysts may raise their ratings of firms in which poor sustainability performance in core practices remains. The extent to which non-core improvements influence ratings increases, we further argue, is contingent on the visibility of those improvements: improvements marked by higher visibility are more likely to influence ratings increases than lower-visibility improvements. This chapter contributes to a growing body of literature that examines the impact of ratings systems on organizations’ practices, and provides an understanding of the psychological foundations of sustainability through a discussion of cognitive choice models.