From Mauritius #1: The Psychology of Building an Institution

I have spent my entire career studying an industry that does not change. That is an exaggeration, but a deliberate one. Ownership has changed hands, regulation has arrived on both sides of the Atlantic, business models have shifted and new participants have entered the market. What has barely moved is the hierarchy. The firms that dominate sovereign credit assessment today are, in substance, the firms that dominated it when I first became fascinated with the world of credit ratings, and the firms that dominated it a generation before that. Concentration has proved more durable than any reform directed at it.

So it is a strange experience to sit in Mauritius this week, in the days before the launch of the Africa Credit Rating Agency, and watch a new institution prepare to take its place in that hierarchy. Scholars of credit rating agencies rarely observe the birth of one. We study incumbents. We write about entrenchment, about reputational capital that compounds over decades, about the regulatory references that turned the opinions of a few private firms into infrastructure. We are, by training, specialists in why things stay the same.

That training makes me appreciate how difficult bringing AfCRA to life must have been.

AfCRA did not emerge from a single imagination from start to finish. It is an African Union initiative, and the AU mandated the African Peer Review Mechanism to advance its establishment. It has been constituted with private ownership and governance, and its arrangements have drawn on transaction advisers and a range of professional participants. I want to be precise about that collective character. Political authorisation supplies one kind of legitimacy. It does not, by itself, produce a functioning institution. Between a continental mandate and an operational credit rating agency lies a long stretch of ground that has to be covered by people, over years, with little certainty that the destination will be reached.

It is that stretch of ground I keep thinking about and, having been privileged to work closely with many of those tasked with bringing AfCRA to fruition, it is a thought process I have been thinking of for quite some while as AfCRA has been taking shape. I remember fondly sitting in Lusaka several years ago at the invitation of the APRM when the idea of AfCRA was a seedling, and it has been some journey since.

Every proposal for an alternative to the established credit rating agencies attracts the same questions. Is it necessary? Will it be independent? Will investors take it seriously? Can it pay its way? These questions are legitimate. I have asked versions of them myself, in print. Scepticism of this kind does real work: it forces an initiative to clarify what it is for and to answer the objections it would rather avoid. But legitimate scepticism, repeated year after year, also becomes an environment, and those advancing the project have to work inside it.

What sustains anyone through that? I am wary of the word conviction, because it is easily romanticised, and because conviction without judgement produces institutions that should never have been built. Yet a distinction needs drawing. Many people believe that Africa deserves rating arrangements better attuned to its economies. Far fewer are prepared to carry that belief through the procedural, financial, and political work required to give it form. Believing that an institution ought to exist costs very little although there are costs to thinking in such ways in particular environments. Yet, helping an institution to exist costs a great deal, and the costs arrive long before any vindication does.

The harder transition, I suspect, is from advocacy to execution. Advocacy is comfortable territory for people like me. One identifies a deficiency, explains its causes and proposes a remedy. The remedy stays clean because it never has to function. Once an ambition becomes an undertaking, it meets everything advocacy could ignore: governance requirements, capital, staffing, the expectations of professionals who will judge the output by standards set elsewhere, and the competing interests of every party whose participation is needed. I am fortunate to have experience in helping design initiatives that have gone on to become internationally impactful, but the level at which AfCRA has been designed, formulated, and this week will be implemented upon is many notches higher in terms of pressure and ultimately consequence.

Battilana, Leca and Boxenbaum (2009), in their account of institutional entrepreneurship, capture part of this. Those who seek to change institutions are embedded in the very fields they want to change, and they must mobilise allies whose interests only partly coincide with their own. The theory describes a structural predicament. It says nothing directly about how that predicament is lived, and I will not pretend otherwise. But one need not speculate about anyone's inner life to recognise that holding a coalition together across years, while answering for every compromise, asks something considerable of the people involved.

Which brings me to the most difficult problem: legitimacy.

Suchman's (1995) framework distinguishes pragmatic, moral, and cognitive legitimacy. A new institution can work towards the first by serving its audiences' interests, and towards the second by persuading them that it does the right thing in the right way. Cognitive legitimacy, the condition of being taken for granted, is another matter. Effort cannot manufacture it. It accumulates. The established credit rating agencies possess it in abundance, which is precisely why investors, regulators, and issuers measure newcomers against them.

Here sits the tension at the centre of any project of this kind. A new credit rating agency must establish what it contributes, whether through wider coverage, deeper analytical capacity, regional expertise, or competition in a concentrated market. Yet its judgements will be read by audiences whose expectations the incumbents have shaped. How does an institution establish its distinctive contribution while observing the conventions that make its judgements credible? Every methodological choice, every governance arrangement, every appointment answers that question in some measure. The judgement lies in telling apart the compromises that make an institution viable from those that would hollow out its purpose. No formula settles this. It is settled case by case, by people who will be criticised whichever way they decide.

I keep thinking of the concept of a paradox. Those who work hardest to bring a credible institution into existence are building something whose credibility will depend on its judgements being its own. A credit rating agency's value rests on independence: from governments, from issuers, and ultimately from those who willed it into being. That independence does not require its builders to disappear from its future. It requires that its professional judgements can never be subordinated to their preferences. The better the work, the more securely those judgements belong to the institution's own processes and its own professionals. Any of us who have built an initiative of any nature that has necessarily gone on to have a life of its own can understand this feeling, but one imagines when the initiative operates at a Continental level, and under such public scrutiny, the emotion behind such a feeling will be supercharged.

There is something admirable in accepting that bargain. The best institutions do not commemorate their builders; they outlast them.

I came to Mauritius as a student of continuity. This week I am watching people attempt the rarer thing, which is to begin. Whatever follows, that beginning was never inevitable. It required people willing to keep insisting that it was possible.

References

Battilana, J., Leca, B. and Boxenbaum, E. (2009) 'How actors change institutions: towards a theory of institutional entrepreneurship', Academy of Management Annals, 3(1), pp. 65-107.

Suchman, M.C. (1995) 'Managing legitimacy: strategic and institutional approaches', Academy of Management Review, 20(3), pp. 571-610.