Widely reported on yesterday were the multiple civil lawsuits, including a complaint filed by the Department of Justice, being brought against Standard & Poor’s (S&P) for charges related to fraud and misrepresentation regarding mortgage-related investments leading up to the financial crisis of 2008.

Would a triple bottom line system for assessing the success of corporations be more effective? Social entrepreneurs have been asking the question for some time, but now, the state of credit agencies renews the discussion in a big way.

Ratings Agencies: Gatekeepers or Toll Collectors?

The California attorney general’s lawsuit, as quoted in CT Post, posed the issue in this way. “In reality, S&P corrupted its ratings process to curry favor with large banks, which paid S&P billions of dollars in return,” the lawsuit states. “In other words, S&P claimed to be a gatekeeper, but it acted like a toll collector.”

The sentiment was echoed across at least fourteen states with Illinois, Connecticut, Mississippi, Arizona, Arkansas, California, Delaware, the District of Columbia, Idaho, Iowa, North Carolina, Maine, Pennsylvania, Missouri, Tennessee and Washington filing suits against S&P.

The federal civil suit against S&P claims damages of $5B. There has been no word on whether similar suits will be filed against other rating agencies.

An Argument For a Triple Bottom Line?

Reading the news makes me think one of the early sessions of Agency & Corporations class in law school. The idea of the bottom line was emphasized not only in the purpose of legal entities such as general partnerships and corporations, but in the fiduciary duty owed to shareholders of various entities. The end goal, broadly speaking, is to find the green and multiply it.
Triple bottom lineI remember thinking, what does a single bottom line (and legal ramifications for not pursuing it) incentivize? What kinds of behaviors does it reward, and which kinds of actions does it penalize.
It was one of the features of social innovation that has fascinated me and catalyzed this exploration, i.e. that there are new, more-inclusive ways to define and measure success. The concept of a triple bottom line is to measure not only profits, but also an entity’s impact on society and the environment to determine their success.
Would a triple bottom line help? If there were multiple paths and factors by which a company or corporation could gain credibility and favor, would it reduce a need for deception in ratings?  Or just create more factors that could be fudged…
It is an open question, but one that is worth exploring. A system pursuing a single end, to the exclusion of others, may yield a certain kind of result—to exclusion of others. If we seek to maximize transparency, sustainability, and community, the entities and measures we use to assess those qualities perhaps should also mirror them.

Social Entrepreneur Considerations

What’s a social entrepreneur to do? Beyond thinking about the core business, the idea, and the innovation—there are all of the legal considerations too. What kind of entity will you be, will you pursue a traditional legal structure and certification (i.e. B corporation certification) or test out a hybrid legal structure?
If you opt for a certification, should you research how the rating agency is monetized. Should it matter whether they are funded by the entities seeking certification, or by those procuring the ratings? How do entities like the Global Impact Investing Ratings System (GIIRS) analyze the triple bottom line?
The S&P lawsuits make these valid and relevant questions, also worth an open discussion. As the field of social enterprise is being defined through legislation, policy, and structure—it is in an ideal phase of the life cycle to look critically at what works with traditional systems, and what can be improved upon. The best place to use what we see in the rear-view mirror to make good decisions about the best way to traverse the road ahead.

Does the Spotlight Change the Art?

The age-old argument of whether art imitates life or the opposite, plays into this discussion in an interesting way.

Christopher Matthews, Times columnist, touches on the role and weight given to credit agencies in his article, “Justice Sues S&P; Is It Time to Rethink the Role of Ratings Agencies?” Mathews cites a study by San Diego Law School professor Frank Portnoy that found that the federal government started incorporating rating agency reports into rulemaking starting in the 1930’s. And then, in 1973, the SEC took the ratings game one step further by designating specific firms as “Nationally Recognized Statistical Ratings Organizations.” Matthews notes, “Predictably enough, it was right around this time that the ratings agencies shifted their business models from charging investors fees for their reports, to charging issuers for being rated.”

In her article, “Sue S&P, Sue Everybody”,  Forbes columnist Lara Hoffmans expounds the theory (and focuses the blame) to Congress as a whole. Says Hoffmans, “[Congress is] directly responsible for the laws requiring major debt issuances to have at least one rating from a rating agency the government certifies as “credible.”

Could it be that rulemakers, in trying to protect Americans by championing independent rating agencies, may have inadvertently incentivized the rating agencies to be less independent? The months ahead promise a deep dive into the issues at hand, at the state and federal level, and from commentary left, right, and center. Heads up, social innovators, stay in the conversation.

What should we write about next?

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