When Does Reputation Matter?

Amanda Sharkey's research explores the potential and pitfalls in using reputational rankings to drive change in the business world.

In 2019, Business Roundtable released a new Statement on the Purpose of a Corporation that deviated radically from its previous statements endorsing shareholder primacy. Signed by 181 CEOs, the new statement asserted clearly and unequivocally that instead of existing primarily to serve shareholders, a corporation's role in society is broader and includes promoting "a healthy environment and economic opportunity for all."

The statement further outlined that each company should commit to protecting the environment, fostering diversity and inclusion among employees, forging ethical partnerships with suppliers and embracing sustainability practices.

"This was the first time that a large group of business leaders made a formal statement like this," said Amanda Sharkey, the Coyle Associate Professor of Management & Organization at the University of Notre Dame's Mendoza College of Business. "You always have to take these things with a grain of salt because they can say one thing, but are they actually doing all of that? But the fact that they were saying it at all got people's attention."

As an organizational theorist and economic sociologist who studies how social and cultural factors impact organizational behaviors and firm performance, Sharkey has long observed the more subtle sea changes that finally led to such a public tipping point among business leaders. When she began her academic career at the University of Chicago in 2011, her business students were heavily finance-oriented and did not immediately see the value in harder-to-quantify topics such as corporate culture or organizational design. That changed by the end of the decade.

"By the time I left in 2022, I could palpably feel the difference in the students," she said. "Those topics were no longer met with immediate skepticism." This was after the Business Roundtable statement, but also after diversity, equity and inclusion (DEI) and environmental, social and governance (ESG) principles became central initiatives at most companies. It was also after the COVID-19 pandemic.

"There is still a great deal of controversy around how much businesses should focus on things like ESG and DEI, but it's a central part of the conversation now," said Sharkey. "COVID also made people realize that you have to think about how people do their jobs and how they are faring as workers, or your business is not going to do well. It made it really salient that this is something that can't be ignored now."

 

Moving the Needle

What issues businesses choose to cast to the periphery or bring to the center, and why, are at the crux of Sharkey's research. She studies how firms' social standing, often encapsulated in third-party reputational ratings and rankings, might alter their behavior. Unlike global pandemics or sweeping statements from top executives, how these reputational rankings move the needle is less obvious. Yet they can serve as temperature gauges for the overall business landscape, and their influence is often cited by policymakers.

"In some areas, governments use indirect means to try to make firms change their behavior, rather than using a heavy regulatory stick. So there are a lot of theories about how these methods will impact behavior," she said. "A lot of my work has looked at how the things that impact a firm's reputation and status don't always play out the way that we think they will."

For example, in the paper, "The Impact of Mandated Pay Gap Transparency on Firms' Reputations as Employers," co-authored by Elizabeth Pontikes and Greta Hsu of the University of California–Davis, Sharkey examined how employees rated their employers on the review site Glassdoor following mandatory pay gap disclosures in the United Kingdom. Policymakers have argued that such mandatory disclosures lead to greater social accountability, though this theory was previously untested.

Sharkey and her co-authors found that for firms with significant disparities in gender-based wage gaps, there was no impact on their Glassdoor ratings. For organizations with pay parity, there was a brief improvement to their ratings.

"You would think that their reputations would suffer and employees would penalize them for large wage gaps, but that didn't happen," she said. "There's always tinkering around how we can implement these types of interventions, whether it's ratings or rankings or information disclosures, in a way that leads to the outcomes that these things were meant to achieve."

Glassdoor is an example of the proliferation of crowdsourced ratings systems that have sprung up in the internet age. These systems provide researchers like Sharkey with a broader data pool and firms with a wide and diverse selection of ratings to manage.

"We don't really have a good sense yet of how firms are responding to the fact that there are so many of these different ratings systems," said Sharkey. "Do they prioritize one over others? The ratings and rankings aren't necessarily capturing the exact same thing, so how do they make sense of it all? There's so much information out there, and I think there's a danger of firms running in 15 different directions to try to make everyone happy. And some of these things end up working at opposite purposes."

Another paper, "Corporate Social Responsibility at the Margins: Firms' Responses to Marginal Inclusion on the Vault Law 100 Ranking," co-authored by the late Wooseok Jung of HEC Paris and David Tan of the University of Washington, drives this insight even further.

Sharkey and her fellow researchers looked at the pro bono policies at law firms ranked just above and below the 100 mark on the prestigious Vault Law 100 ranking. Determining that pro bono work is the law firm equivalent of corporate social responsibility (CSR) engagement, they found that firms included in the very bottom of the ranking ramped up pro bono policies to maintain their ranking. Yet despite policies to encourage attorneys to increase their pro bono practice, the researchers found no increase in the number of hours that attorneys actually devoted to pro bono work.

"You might expect that pro bono policies would have an impact, but policies are often decoupled from practice," said Sharkey. "These employees have a million other things that are incentivizing them to focus on their clients instead. It's an example of how these ratings affect firms' behaviors in some ways that are good, but in other ways that don't actually complete the mission."

 

Spillover Effects

Despite the fallibility of policymakers relying on ratings and rankings to drive firms' behavior or ethical outcomes, Sharkey's research does reveal how reputational standings can compel companies to make better ethical decisions. Take, for example, the Business Roundtable statement from 2019. As much as the statement itself might have been influential, it was the 181 CEO signatories that made it so monumental.

"Peer pressure works," said Sharkey, referencing a paper she co-authored with Patricia Bromley at the University of Utah, "Can Ratings Have Indirect Effects? Evidence from the Organizational Response to Peers' Environmental Ratings."

In studying firms that were not included in an environmental performance rating but were surrounded by peer firms that were, they found spillover effects on their behavior.

"Sometimes, there are normative pressures that ratings bring forth," said Sharkey. "As they draw attention to an issue and firms begin responding to that issue, we see peer firms respond in the same way even if they are not rated."

With the proliferation of rankings, Sharkey has ample opportunities to study corporate reputational standings. She is particularly interested in the world of big pharma and determining what behaviors led to — and might have prevented — the opioid epidemic.

Sharkey also appreciates how today's business students are far more open to discussing corporate culture and organizational design. She brings together the social and the strategic in the undergraduate course Foundations of Strategy, where she emphasizes that to accomplish strategic goals, business leaders must first understand how people operate within organizations.

"I always try to bring in my sociologist background," she said. "You can decide on the best strategy, but then you have to find a way to communicate it to your employees and embed it in the organization so that they have a guiding principle as they make the thousands of decisions that they make on a day-to-day basis. The organizational structures have to be there first."

 

Illustration by Carmona Errata. Photo by Michael Caterina/University of Notre Dame.

 

Amanda Sharkey is the Coyle Associate Professor of Management & Organization. She studies how social and cultural factors impact organizational behaviors and firm performance.

 

Published

"Corporate Social Responsibility at the Margins: Firms' Responses to Marginal Inclusion on the Vault Law 100 Ranking"
Strategic Management Journal (2024)
Amanda Sharkey, Wooseok Jung and David Tan