Social risks in a digitally connected world

Published on
April 19, 2018

In today’s digitally connected, social media savvy world, we are seeing a new form of risk threatening company executives, brands and organisations, called “social risk”.

In the US, we’ve seen the speed with which social movements can take hold, with examples including #NeverAgain and #BoycottNRA which followed the Parkland school shootings.

Within days of this tragedy, these movements, led by high-school and college students using social media, sought gun reform in the US to improve safety in schools.

These movements have driven a backlash which corporates have not been able to ignore, forcing a number to cut their ties with the industry. This includes two of the nation’s largest US-based airlines – Delta and United Airlines have both decided to end their ties with the NRA.

A recent international study by Darden Graduate Business School and APCO Worldwide has found that 94% of respondents believed that companies have the ability to shape a better society.

In another APCO study of consumer elites, 89% of respondents believed companies should support social issues that are consistent with their business focus and expertise.

The inability of companies and their executives to recognise the threat of social risk can have dramatic impacts on financial considerations such as profitability and market share, but also on the organisation’s ability to attract future employees, particularly among millennials who are purpose-driven decision makers.

Closer to home, some of Australia’s largest companies have faced small shareholder campaigns on issues such as climate change and human rights. These campaigns are being increasingly backed by major investors.

Research indicates that those who have come out on the side of NGO-driven rebellions, such as those coordinated by the Australian Centre for Corporate Responsibility, have attracted some serious hitters in the investment world.

Australia’s Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is another clear example of the power of social movements, after the industry got caught up in the wave of populist anti-banking sentiment following a series of scandals.

Recently one of Australia’s former top banking regulators, Ian Laughlin, said the risk management strategies across a number of Australia’s biggest businesses had failed to keep pace with changing social values. This left many companies vulnerable to consumer and political attacks.

In a Dialogue Paper Social Risks – for a financial services business, issued by the Actuaries Institute, Laughlin said institutions do not seem to be effectively managing the risks that come from swiftly changing social norms and attitudes.

Laughlin, who was formerly deputy chair of Australian Prudential Regulatory Authority, said today, society’s expectations are rightfully much higher and tolerance for egregious practices are much lower than they once were.

Society’s ability to see and to call out unacceptable practices and to highlight poor outcomes has become much more powerful via Twitter, Facebook and other social media platforms.

He believes a key issue has been that institutions have not managed the risks that come from changing social attitudes and norms and the power of new social capabilities, which now requires a fresh approach.

The factors that fuel social risks include ready access to information and social media in particular. At the same time, there is something of a paradox: more information, but also more wrong information that spreads with great speed.

Laughlin’s paper states that fake news is a danger for Australian companies, due to risk that an accusation may blow up, whether it has merit or not.

He has produced labels for types of social risk that include:

  • Cynicism risk – acceptance of poor attitudes and behaviour
  • True values risk – when the actual values of management and staff conflict with the company’s espoused values
  • Insight risk – when a business has a poor appreciation of current social norms and expectations, and the pace of change
  • Tolerance risk – society’s attitudes change quickly and significantly, catching a business unawares.

A key for companies when dealing with social risks is they must have a deep understanding of the social impact of their businesses, including any potential latent impacts on stakeholders as the business grows, thus increasing its social risk profile.

The Dialogue Paper promotes the idea of social risk sensing, and draws a distinction between this and the use of more traditional risk indicators.

This highlights the need for organisations to have deep and effective capabilities to monitor and assess social risks. The business should have sensors which assess social attitudes and norms, and interpret their impacts on risk for the business.

Risk sensing involves sensing social risks and their possible impact in almost real time. Sensors can include pulse checks of attitudes or automated analysis of consumer and customer sentiment trends on the web and social media, including data analytics, which give companies the capabilities to pinpoint areas of internal and external concern in real time and takes the guesswork out of social risk management.

In addition to technology capabilities, the engagement of a Social Risk Officer may also facilitate a deep understanding of the business, its customers, and social risks.