Sunday, December 11, 2011

 Rating Agencies Challenged

The methodology of the rating agency Standard & Poor is increasingly being questioned after its recent extensive downgrading of the credit worthiness of diverse European countries (see The European Union is even considering creating a European rating agency in order to break the monopoly of the American rating agencies (see,1518,773549,00.html). With this, the EU suggests that the methodology of a rating agency is also culturally influenced.

This reminds me of an experience that I made in 1995 in the setting of the first worldwide roundtable talks pertaining to stakeholder relationships, which were organized by Shell in the wake of the “Brent Spar” event and the conviction of Ken Saro Wiwa in Nigeria (see Sachs, Rühli, Kern 2009). During these round-tables, the question was addressed in considerable depth as to what the future of reporting to stakeholders should look like for a firm. The challenge was to come up with a method which does not simply show the financial results of a company, but also takes account of the social and ecological dimensions. It was discovered that the specific expectations for such reporting was strongly dependent on the cultural background of the involved parties. The discussion participants had two basic approaches: transparency of the business operations and the trust in those who carry out these business operations. 

These roundtables revealed that the transparency of indicators which could be measured was most central in the United States. This approach was denominated as a “show me” culture. In Asia, on the other hand, stakeholders regarded trust as the most important indicator, which led to the designation of a “trust me” culture. In Europe, again, stakeholders sought to find a balance between trust and transparency, which some called a “tell me” culture. The result was that the respective cultural background of each participant had a significant effect on the choice of rating criteria.

One can thus reasonably assume that the “show me” culture was most salient with the three largest American rating agencies. The limitations of this approach are however becoming evident: a one-sided focus on quantifiable transparency will not assist us to overcome the current crisis of trust. For this the rating agencies will require evaluation methods which indicate how a broader perspective of trust can be developed (see also Sachs, Rühli, 2011, chapter 5). If the creation of a European rating agency is the solution is currently being debated. In any case, it is clear that rating agencies are having their methodologies challenged.

Sybille Sachs

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