How Can We Certify the Certifiers?

An important challenge facing companies today is how to engender trust in the products they sell, and having gained buyers’ trust, how to keep it through thick and thin.

There are four categories of attributes that consumers care about. The first and simplest is search attributes[i] such as a product’s weight, color, or price. “Search” attributes are obvious tangible properties that consumers can search for and personally evaluate without ever buying or using the product.

Experience attributes are claims about the product that the consumer cannot verify until after the purchase. These include, for example, flavor, ease of use, and service quality.

Intrinsic credence attributes[ii] include the ingredients of a food item, or automobile emissions, which are inherent to the product but cannot be readily evaluated by the average consumer, even after buying and using it. Only someone with specialized equipment can verify these attributes. They are called credence[iii] attributes because the consumer must give credence to the label and trust that the maker's supply chain delivered on its hard-to-test claims.

The final category is hidden credence attributes, which include claims of the environmental impact associated with the process of making goods and bringing them to market. These may include evaluations of the supply chain’s carbon footprint, local sourcing strategies, use of hormone-free cows, or qualifying as a certified kosher product. Hidden credence attributes are ones tied to the history or provenance of the product, which no product test can reveal. These attributes can only be verified by someone with an accurate and detailed historical record of the product’s movement and sourcing in the supply chain. 

One way to engender and keep consumer trust – especially in relation to hidden credence attributes – is to qualify products with a stamp of approval from a credible certification authority, and many enterprises go down this route.

But how do enterprises find certification or accreditation agencies that are sufficiently credible?

It seems to be getting harder to answer this question.

The snowballing Volkswagen emission-testing scandal is a current example of the pitfalls of product certification, and the immense reputational damage that can follow when an accreditation process appears to be flawed. 

In Europe it is common practice to test pre-production models of cars that have been specially prepared for the emissions-testing ordeal. Dubbed “golden vehicles” the cars can be shorn of appendages such as mirrors and have over-inflated tires. Critics say that the tests are something of charade because they do not replicate real-world driving conditions. Moreover, the tests are carried out by third-party organizations paid by the manufacturers, or at the manufacturers’ own facilities.

In a recent Wall Street Journal article a representative from Emissions Analytics, an independent emissions analysts, said: “Everyone is gaming the tests in Europe.”[iv]

Such scams are by no means confined to the auto industry, and each time a product certification process is portrayed as untrustworthy, buyer confidence takes a knock. 

This happened in 2008 when credit-rating agencies came in for scathing criticism over their failure to provide realistic evaluations of the mortgage-backed securities that were at the center of the financial meltdown. The agencies are paid by the companies that issue debt, and in 2008 gave stellar ratings to investment vehicles that turned out to be toxic. Their reputation still has not fully recovered.

More recently, a number of for-profit educational institutions have been found guilty of shady practices such as exaggerating the number of their graduates who land jobs. Again, the lack of effective oversight from a reputable third-party accreditation body is seen as a root cause of the problem.

Universities game their numbers because the approval of self-policing accreditors – private, not-for-profit organizations made up of member schools – is required for educational institutions to gain access to billions of dollars in federal student loans. This month the Obama Administration announced plans to take executive action to lift accreditation standards in the industry.[v]

 Increasing demand to comply with ever-higher environmental sustainability standards has opened up an accreditation minefield that if not navigated properly, can blow up a company’s reputation.

 Gaining a reputation for “greenwashing” can be particularly damaging. The term pertains to claimed environmental credentials that promote the perception that an organization’s products and processes are environmentally friendly – even though in reality they are not.

 Some companies set out to hoodwink customers in this way, but it’s also possible to be branded as a greenwasher inadvertently, by unknowingly adopting product labels that are not credible. The lack of credibility could be because the labelling organization has a flawed auditing process, or is simply a shell for making money.

One of the problems in the environmental arena is the sheer number of product labels and associated agencies. They cover a huge number of product categories and environments from forests to oceans. As a result, all eco-labels are not created equal. Anastasia O’Rourke, co-creator of the Ecolabel Index, has documented wide variations in the rigor required by different labels. Some expect companies to undergo a comprehensive onsite verification process administered by a third party; others require little more than a payment to grant a label.

Consequently, companies not only need to map which labels pertain to their businesses, they also need to verify that the audit system behind the labels is rigorous and meaningful.

The MIT Responsible Supply Chain Lab is carrying out extensive research to help companies make sense of the various labeling systems. The Lab is developing a typology of organizations that promote transparency and help companies to communicate the environmental sustainability of their supply chains.

A key issue that pertains to any system of accreditation is the extent to which the accreditor profits from doing its job, and the extent to which it depends on the business of enterprises that use its services. Metrics like these can help ascertain whether the certifying organization can be impartial and rigorous.

 Government-run schemes are less prone to such issues, and there are a number of successful examples. The Energy Star and Nordic Swan labels in the US and Scandinavia respectively are two stand-out examples. But many governments are loathe to support schemes like these, especially at a time when there is political pressure to outsource more and more activities to private sector organizations.

The US organization Consumer Reports is an example of a highly respected private sector product tester. Key to the organization’s excellent reputation is that it does not accept advertising from the companies it audits, and pays for the products it tests.

How can we encourage the development of more Consumer Reports type accreditors and certification processes in such a way that they are financially viable? This is surely the best route to building consumer confidence in the veracity of products and services. 

If you have an answer to this question, I would love to hear it.

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[i] Phillip Nelson (1970), Information and Consumer Behavior, J. Pol.

Econ. Vol. 78, No. 2. pp. 311-329

[ii] Darby, M. and Karni, E. (1973). “Free Competition and the Optimal Amount of Fraud” Journal of Law and Economics, Vol. 16, No. 1. pp. 67-88.

[iii] Darby, M. and Karni, E. (1973). “Free Competition and the Optimal Amount of Fraud”. Journal of Law and Economics, Vol. 16, No. 1. pp. 67-88.

[iv] Volkswagen scandal: Are car emissions tests fit for purpose? Russel Hotten, BBC News, 24 September 2015.

[v] Obama Targets College Accreditors, Douglas Belkin and Andrea Fuller, Wall Street Journal, November 6 2015.