The Dangers of Indicators

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Increased reliance on indicators can mask an institution’s non-quantifiable policies, Galit A. Sarfaty argues.

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Quantitative indicators have emerged as increasingly prevalent tools for achieving regulatory goals. By requiring or encouraging companies to disclose their social as well as economic performance against a set of discrete, quantitative metrics, governmental and nongovernmental institutions around the world seek to induce the same kind of improvements in firms’ behavior that traditional forms of regulation have long sought to achieve.

Yet in a recent paper, Galit A. Sarfaty, an Assistant Professor of Legal Studies and Business Ethics at the Wharton School of Business of the University of Pennsylvania, identifies a series of dangers associated with an increased reliance on indicators.

“Indicators do not just serve as instruments for shaping behavior,” she explained. “They themselves have normative authority.  We need to pay attention to their unintended consequences if we want to enhance the potential of indicators to serve as effective regulatory tools.”

Sarfaty’s paper, “Regulating by Numbers: A Case Study of Corporate Sustainability Reporting,” focuses specifically on the influence of indicators such as the Global Reporting Initiative (GRI).  The GRI is a nongovernmental organization that has developed a set of widely used guidelines for reporting on a company’s social, environmental, and economic performance. Corporate reports that comply with these guidelines will include indicators such as rates of occupational injury and total energy consumption. Shareholders, governmental institutions, and nongovernmental institutions can access the reports and use them to evaluate companies.

The use of indicators also can exacerbate the tendency to shift or translate all data into measurements of financial risk. This abstraction of key considerations during the decision making process can disguise value-laden policy decisions under a veil of empirical objectivity. In addition, this shift prioritizes accountants and other technical experts who often lack the legal or policy expertise to understand the implications of particular indicators within regulatory systems.

The accuracy and neutrality of indicator reporting also raises concern. Organizations that develop indicator reporting systems – as well as the third party accounting firms which monitor the accuracy of reports under these systems — have their own internal motivations that may not coincide with the goals of a system of global governance.

“Indicators can be useful tools, but are not ends in themselves,” Sarfaty said.  “The ultimate goal should be changing behavior in the appropriate direction.” She argues that the dangers of indicators can be reduced by balancing quantitative analyses with qualitative information and carefully monitoring the objectivity of third party accounting as well as the overall indicator system itself.  “The right indicator,” Sarfaty noted, “is one where when the number goes up, then things actually get better on the ground.”