Commentary: Treat Social Risk Like Any Other Risk to Avoid Business Disruptions

The ramp speed of business-disrupting social issues has accelerated in 2019. Mother’s Day triggered a backlash for Nike’s policy of reducing pay for some sponsored female athletes while pregnant, extending the criticisms and litigation on its gender equity issues. And, in Silicon Valley the modus operandi for many has been to build scale and worry later about social impact. This has resulted in a public reckoning for companies like Palantir, which is facing mounting social criticism for its business with the Immigration and Customs Enforcement agency.

While none of these companies anticipated these business disruptions, they were not random events caused by external forces. They were self-inflicted, stemming from their business policies or strategies. It’s a cautionary tale of a new category of enterprise risk management: social risk.

Every company has social risks inherent to its business. But, like an iceberg below the surface, those risks are often invisible until it is too late. A company’s social footprint—the social impact of the way it does business—becomes a material social risk when its negative social impact grows with the company. When a company’s growth multiplies its negative impact, outrage follows. In today’s social landscape for business, a company’s actions are under constant public scrutiny, one click away from a viral crisis with an airtime longer than a momentary disruption.

That’s why global investment firms like BlackRock and Vanguard now expect boards of directors and C-suites to consider social risks that can disrupt their business and erode investor value. As firms examine their investment portfolios, social risks under the corporate waterline are becoming more visible.

If companies assess the social impact of their policies at the front end of planning, they can mitigate the business disruptions and offer solutions that are competitively differentiating—unlike Nike, for example, Under Armour and New Balance have reportedly honored their contracts for sponsored female athletes without disruption for pregnancy.

While Nike’s viral social risk misstep was triggered by former Nike-endorsed athletes who waited until after their employment was over to speak out, as recent employee protests at Wayfair (over the alleged selling of furniture to a government contractor that works with detention centers) have demonstrated, current employees are now early public critics when corporate actions do not align with mission and values. In the battle to recruit and retain the next generation workforce, anticipating social risk is also a competitive imperative.

But corporate social risks often hide in plain sight due to the insulating power of the corporate cultural bubble. They are inherent negatives baked into the way of doing business. Negative stakeholder impact quietly grows with the company until a value-eroding crisis becomes public.

To take control of these self-inflicted business disruptions, social risk assessments must be integrated into the due diligence of boards of directors and C-suites to inform policies, strategies, and enterprise risk management. These assessments must be integral intelligence to material decisions. Companies should be considering the social risk profile of a merger and acquisition target, the social risk implications of implementing a new business model, or adding a new technology without a track record or regulatory guard rails.

And these are just basic examples. Anticipating the social landscape and its business implications requires an outside-in perspective, the ability to step outside of the cultural bubble to ask questions before the fact, not after the social outrage.

Social risk is not generic: It is embedded in and specific to the company’s strategies, policies, business model, and operations. In particular, companies embracing corporate purpose must ensure they have done their own due diligence on their social risks with the honest assessment of an outside partner. Doing one without the other can risk more than just a viral moment but shareholder petitions, government investigations, and litigation.

Assessing and addressing social risk is not formulaic. It mixes the “art” of the judgment of senior experts, internal and external, with experience navigating the new business landscape from globally diverse perspectives, with the “science” of social analytics and research that can test scenarios to confirm the path forward that will positively move the needle.

Companies that integrate this art and science of social risk assessment into their strategies and operations—seeking periodic review and feedback from various stakeholders and external experts—will better anticipate the inherent risks hidden in the corporate blind spots and earn the sustainable trust and respect of customers and employees alike.

As companies evaluate how they will interact in this changing world, assessing social risk will not only protect their bottom line, it might give them the ability to outpace their competition as they grow for the future.

Margery Kraus is founder and executive chairman of APCO Worldwide. Barie Carmichael is a senior counselor at APCO Worldwide and a Batten Fellow at the University of Virginia’s Darden Graduate Business School.