Rating Agencies as a Corporate Governance Mechanism: Power and Trust Production in Debt Capital Markets

Abstract

Purpose – The purpose of this chapter is to explore the voluntary corporate governance role played by credit rating agencies, closing the ‘trust at a distance’ gap which might otherwise hinder fundraising in debt capital markets.

Methodology/approach – The chapter draws on Giddens’ system trust theory and Foucauldian perspectives of knowledge/power to unpack trust production as a discursive process in financial markets. Foucauldian discourse analytic techniques are used to examine texts deployed by or about Standard & Poor's, the global credit rating agency, leading up to the 2007 credit crunch.

Findings – The texts analysed illustrate the influence of rating agencies in producing trust as well as mistrust in debt instruments.

Research limitations/implications – Rating agencies produce trust by aligning with state regulatory systems, simplifying complex debt instruments with ‘AAA’ and other well-known mnemonics, as well as offering apparent transparency and guarantees.

Practical implications – While influential, rating agencies can only produce trust by proxy. Their contribution to the actual protection of investments is minimal.

Social implications – The analysis highlights the flawed nature of trust relations in debt capital markets as rating agencies’ primary customers are the arrangers and issuers of debt rather than the investors who seek protection from risk.

Originality/value – The chapter sheds light on the deliberate nature of trust production in financial markets. Five trust/mistrust production practices are introduced – protecting, guaranteeing, aligning, making visible and simplifying. Strategic trust production is established as part of corporate governance ideology in financial markets.

Citation

Bourne, C. (2012), "Rating Agencies as a Corporate Governance Mechanism: Power and Trust Production in Debt Capital Markets", Tench, R., Sun, W. and Jones, B. (Ed.) Corporate Social Irresponsibility: A Challenging Concept (Critical Studies on Corporate Responsibility, Governance and Sustainability, Vol. 4), Emerald Group Publishing Limited, Leeds, pp. 135-156. https://doi.org/10.1108/S2043-9059(2012)0000004015