Social risk: it's all around us
The accelerating rise of social risk has continued in 2022, spurred, in part, by continued political, public, and cross-industry debate on the influences and objectives of ESG (Environmental, Social and Corporate Governance), and disparity between global and national social views, norms and standards.
The war in Ukraine has resulted in 7.9 million Ukrainian refugees seeking refuge across Europe. This tested the social fabric and resolve of European nations, with the UK Government coming under considerable pressure from the public following delays to mobilising applicable support for Ukrainian refugees. The energy and cost-of-living crisis sweeping across the globe has further accentuated the debate on the role of oil and gas majors in fuelling social division and instability. The social impacts resulting from the inflationary crisis combined with a worsening global economic outlook has driven anti-government protests to a new high in 2022. Politicians across political spectrums are rushing to demonstrate their understanding and support of social inequalities by introducing new social support programmes, e.g., the Energy Price Guarantee introduced by the UK Government, and cross-party proposals on social policies designed to uphold social stability and embed new social norms. We have firmly entered a new era for companies across industries, where failing to detect, manage and respond to emerging and fast-changing social risks presents a new material threat to their financial and reputational performance, not least those who wake up one morning and find themselves in the line of fire, however unintentional.
Advancements in social risk in 2022 have provided a clear and frightening example of the dangers presented to companies when they are not prepared to respond to sudden and catastrophic changes in social views, norms, or standards. In an earlier blog, I proposed a social risk definition, which I recommend extending to greater articulate the potential harms for companies failing to adequately identify, assess, manage, and govern social risks.
Social risk definition
The risk of a party (a company or individual person) suffering reproach from segments of society due to transacting or associating with another party that is perceived by society to have objectionable biases or incompatible views, resulting in immediate or longer term reputational and financial harm, with the propensity for social disassociation to jeopardise the strategic direction or the continuing performance of the company
A social risk case study: Twitter
In the corporate pillar of society, Elon Musk’s purchase of Twitter in October 2022 has provided the clearest example yet of the more visible relationship between social risk, financial performance, and reputational standing. Elon Musk, a self-proclaimed “free-speech absolutist” announced his intentions to make the Twitter platform a place for “free speech”. Musk’s vision for Twitter resulted in an almost immediate reproach from high-profile people and companies across the globe, with the platform expected to have lost over 1 million users in his first 8 weeks of ownership and seen a “massive” drop in advertising revenues since his takeover with the company now losing $4 million a day (provided by Elon Musk in a speech dated 4th November). Musk’s latest sale of Tesla shares, sold at a 60% decline in share price during week commencing 5th December 2022), earned $3.6 billion. The proceeds from this sale are widely expected to support Twitter’s continued existence.
For some people, Musk’s vision of Twitter as a ‘free speech’ platform was long overdue. Twitter’s permanent suspension of Donald Trump’s account, announced in January 2021, caused widespread discontent, and opened Twitter to accusations that it was influencing the US’s political debate. Trump himself claimed that Twitter was “…not about free speech”.
So, why was Musk’s vision for Twitter as a free-speech platform so quickly and characteristically rejected? After all, freedom of expression is one of the essential foundations of a democratic society. Freedom of expression is the right to criticise, to make assumptions or value judgments and the right to have opinions.
The answer lies in the recognition of social risk as a new and significant threat to financial and reputational resilience. Musk’s vision for Twitter escalated concerns of the platform becoming a place for hate speech, violence, and extremists. His vision, whilst considered by some people to uphold important values of democracy (referring to free speech), led to a rapid increase in mistrust of Twitter and concerns that controls intended to detect and delete harmful content would be diminished to promote the platform as a fully autonomous location for free-speech and expression of opinions, however hateful, violent, or extreme.
These perceptions, whether right or wrong, resulted in some high-profile people and companies taking immediate actions to prevent being perceived as advocating for or supporting incompatible views with societal norms. Blue-chip companies, such as General Motors, Ford, Audi, Pfizer, and United Airlines, withdrew advertising from Twitter within one week of Musk’s takeover. People (or influencers), such as Whoopi Goldberg, and Jim Carrey also left the platform. Sir Elton John left Twitter saying “…“it saddens me to see how misinformation is now being used to divide our world.”
How would you approach the social risks facing Twitter?
- Social norms. The rise and integration of social media platforms into the day-to-day functioning of society has led to the creation and rapid adoption of new social norms. New social views and standards are formed overnight, and have the propensity to gain mass public, corporate and political support. These social norms and standards can alter the perceptions of company brands, and high-profile people who are associated with such brands (e.g., chief executive officers and other members of a company’s governance body), becoming objectionable and incompatible with existing or changing views. Consequences can manifest quickly and cause immediate impact on a company’s financial performance and outlook.
- Risk averse. As more and more case studies of social risks become visible, business leaders are becoming more risk conscious and alert to the importance of protecting their company’s brand standing. The immediate tendency is to take a risk-averse position, as companies have done since the change in Twitter’s vision following Musk’s takeover. In more complex social risk scenarios, companies should consider cautiously their response to and recovery from social risks, ensuring any change in association with or implied support of existing, changing, or new social norms and standards do not carry longer-term consequences that might lead to the company exceeding stated risk appetite and tolerance limits.
- In the first days following Musk’s takeover of Twitter, steps by companies to withdraw advertising from Twitter were as much a reaction to Musk’s early conviction of Twitter as they were of Twitter’s actions. Musk spoke regularly about his views of Twitter and its management body in the months-long process of buying the company. He publicised his critique of Twitter, often using his views of Twitter’s failings as a basis to compel the merits of his vision for the company. Companies that reacted immediately to step-back from Twitter upon Musk’s takeover demonstrated the growing sensitivities of companies and business leaders being associated with incompatible views. In this case, Musk’s advocacy of Twitter as a ‘free speech’ platform was rejected by business leaders given concerns of the platform becoming a focal location of hate speech, violence, and extremists.
- Financial harm. Twitter’s financial decline since Musk’s takeover demonstrates the direct relationship between a company’s social risk profile, its financial performance, and its outlook. Twitter is not the first company to demonstrate the strengthening link between social risk and financial performance, though the speed and severity of financial harm caused to Twitter could indicate a more aggressive decline in financial performance for other companies in the future, particularly where social risks are inadequately prevented, responded to, or recovered from.
Ask yourself, is the risk worth taking?
Social risk should now feature in the risk taxonomy and risk management framework of every company, big and small. Social risks can manifest rapidly and put the very existence of a company in jeopardy. Social media platforms provide an accessible location for the global public to function as judge and jury 24x7x365, setting new social norms and standards that could go against the values and fabric of a company’s history, product offering and competitive position in the marketplace.
Business leaders and risk management professionals should consider:
- The adequacy of their external surveillance tools to identify changing social biases and views. Consideration should be given to social events beyond the geographical borders from which the company operates to identify changing social views that could take on a wider global existence.
- The effectiveness of internal risk management processes to assess the potential velocity and impact of changes in social biases and views on the company’s product offering, operating structures, pre-existing company communications, values, and beliefs.
- Requiring management and governance body members to attend annual crisis management training to evaluate and enhance their social risk awareness, responsiveness, and decision-making.
- Transparency of social risk reporting in appropriate management committees and boards, promoting open and candid discussion on current and emerging social risks and the potential exposure to the company.
- Increasing employee awareness of social risks through policies, standards, training and communications.
Is social risk manageable?
As the saying goes, trust takes years to build and only seconds to destroy. This is true for any company, not least of Twitter and its new chief executive.
Undeniably, however, Twitter is a valuable and important social platform for many companies around the world. It has, and continues to be, a location for companies to engage new and existing customers. At the beginning of 2022, Twitter had 450 million monthly users, with 237 million of these users accessing the platform daily. The scale and global reach of Twitter’s user base presents huge opportunity for thousands of companies around the world. As Twitter’s newly installed management body seek to regain the trust of paying customers and the wider public, they will need to demonstrate the strength of operational controls to detect and reliably eradicate harmful content. They will need to demonstrate the suite of solutions incorporated into the functioning of the platform to help companies effectively manage and govern social risks, recognising the declining appetite for companies across industries to take risks which compete against or contradict evolving social views, norms, and standards.
Musk did not purchase Twitter to ruin the company but to transform it. Whether he can or not will depend on whether the public and companies learn to trust his intentions of transforming Twitter into a safe, reliable, and trusted international community upholding the highest standards of social values, norms, and decision-making.
How are you identifying, assessing, managing, and governing social risk in your company?
