Approaches to Assessing Corporate Performance on Socially Responsible Operations

Recent Erb Institute research aims to review the current status of indicators used by different assessment methodologies to measure corporate performance on socially responsible operations and identify potential gaps in their effectiveness.

This project was generously funded by the University of Michigan President’s Advisory Committee on Labor Standards and Human Rights (PACLSHR) and the University of Michigan’s Erb Institute.

Executive Summary

Following the adoption of the UN Guiding Principles on Business and Human Rights, which mandated business’s responsibility to respect human rights, increasing demand for transparency in corporate supply chains led to a surge in the number of assessment methodologies available to evaluate a company’s performance in socially responsible operations. However, the overabundance of such assessment methodologies has created problems: companies are burdened with the number of indicators to track, and their effectiveness in changing firm behavior is unclear. Previous studies on investor-focused assessment methodologies revealed that the current indicators fail to provide useful information for investors to evaluate corporations’ social performance.

This research aims to review the current status of indicators used by different assessment methodologies to measure corporate performance on socially responsible operations and identify potential gaps in their effectiveness. We reviewed 19 assessment methodologies, including management guidelines, reporting frameworks, environmental, social and governance (ESG) ratings and compliance standards, and analyzed the individual metrics used by each assessment methodology. Our analysis focuses on who developed the indicators, what is being measured, and how it is measured, including indicator type (input, activity, output, outcome) and variable type (binary, categorical, continuous, descriptive).

Our study finds that different biases in the social performance indicators influence their usability in improving outcomes for affected stakeholders. Worker unions, community organizations and supplier trade associations are disproportionately underrepresented in the development of assessment methodologies. Indicators tend to focus on internal management practices rather than the impact on labor and community rights. They also measure companies’ inputs and activities with a binary approach rather than a contextual analysis of outcomes on the affected stakeholders. Also, only a small fraction of the indicators referenced supply chains and required information on suppliers’ social performance.

These biases can exacerbate the current inefficiencies in measuring corporate social performance. By reflecting the perspectives of only a certain group of stakeholders, the indicators may fail to capture critical information that represents actual impact on workers and affected communities. A more inclusive discussion of social performance indicators is needed to improve effectiveness. As next steps, our research suggests a need for comprehensive mapping of activities to outcome indicators and an analysis of stakeholder preferences on desired outcomes—so that assessment methodologies for socially responsible operations can be developed more inclusively.