“Today, firms are evaluated by rankings and ratings more frequently than ever,” Wooseok Jung, Amanda Sharkey and David Tan wrote in their research paper. These can influence a company's reputation, customer base, talent acquisition, and financial performance. “A lot of times, rankings are implemented in a way to publicly motivate firms to do things that they might not ordinarily do because they put a sort of public pressure on them. I have always been interested in the impact of these rankings, and whether they actually lead to the outcomes they are designed to achieve,” explains Professor Amanda Sharkey.
“That must be why Wooseok approached me in June 2020, three months into Covid. I was so busy and exhausted from learning to teach MBA students online while my own young children were doing online school at home. I really didn’t think I should say yes to work with this guy I didn’t know, but he had this really interesting idea and rare data,” Amanda Sharkey recalls. “When you start working with someone new, you never know how it will turn out, but I’m so glad I worked with him because he was such a fantastic co-author. He was a really thoughtful scholar, a very kind person, and I looked forward to our meetings.” This mirrors what other fellow academics said after his untimely passing.
With a higher status come valuable advantages
It may seem obvious but companies that perform well in sustainability rankings, like Patagonia, often attract environmentally-conscious consumers and investors. Conversely, being removed from a list like the S&P 500 ESG (Environmental, Social, and Governance) Index will lead to tweets by Tesla CEO Elon Musk such as “ESG is a scam. It has been weaponized by phony social justice warriors.” But also (and more importantly) to Tesla’s share price dropping from $363 to $113.
That’s because rankings impact firms’ status (among other things), which Wooseok Jung had a keen interest in. “Information intermediaries, such as ratings and rankings, impose boundaries demarcating groups of organizations on the basis of categorical status, defined as ‘shared beliefs about the relative esteem of different types of organizations’,” the researchers write. For example, Business Ethics magazine's 100 Best Corporate Citizens list establishes a categorical status distinction between firms that make the list, as compared to those that are not included. And the Fortune 500 cut-off marks a salient status distinction between firms whose revenues are sizable enough to warrant their inclusion versus those that are not. Prior research has shown that categorical status distinctions can confer valuable advantages on higher-status firms.”
Is corporate social responsibility a marginal issue?
But what happens when firms are only marginally included in rankings (e.g., 98th, or 99th out of 100), like Tesla when it first made it into the S&P 500 ESG Index (in May 2021) “by a slim margin”, or rejoined it in 2023 thanks only to more environmental disclosures? The company does not seem to have gone out of its way to alleviate other concerns over racial discrimination as well as product responsibility. Although Tesla has said it does not tolerate discrimination and fired employees accused of racist conduct, it only settled a former employee’s racial discrimination suit after two jury-trial losses. And it is still fighting against a federal racial discrimination and retaliation lawsuit by the US Equal Employment Opportunity Commission and a class action lawsuit by nearly 6,000 Black employees (which it calls a “hotbed of misinformation”).
Being ranked potentially exposes firms to greater scrutiny and anxiety
Do all companies act this way? That’s what the researchers looked into. Amanda Sharkey comments that research on status often argues that firms that achieve a higher one sometimes become complacent, but that it’s not what they found. They take significant steps to improve their CSR-related structures, particularly in ways that other peers have done. “We argue that this reaction is likely driven by a desire to secure their position, deflect potential criticism, and alleviate the anxiety that comes with their newfound visibility,” Wooseok Jung posted.
The research team analyzed pro bono policies of the largest U.S. law firms using a set of data collected by Wooseok Jung from the National Association for Law Placement, as well as information from the influential Vault Law 100 ranking. The Vault data demarcates two groups of firms: the top 100 highest-status law firms (from employers’ perspective), and all the others.
Window dressing or performance getting in the way?
“Consistent with the mechanism of status anxiety, we found that this effect is even stronger for firms that have experienced highly fluctuating rank positions and thereby have frequently crossed the boundary. Interestingly, despite such cosmetic efforts from the marginally included, there is no notable increase in actual CSR commitments from them,” Wooseok Jung added in his post.
The findings therefore offer insights into how rankings influence firms' CSR strategies and their efforts to balance status and performance. “Even as we observed that marginally ranked firms adopted new CSR support policies, we found no evidence that they increased the time they spent on pro bono work, the authors write. We cannot definitively determine why this is the case, but countervailing financial-performance pressures (e.g., billable-hour quotas) that lead to trade-offs in how lawyers spend their time are likely to contribute to this outcome.”
