Understanding and Mitigating Social Risk

This post first appeared on Risk Management Magazine. Read the original article.

The practice of risk and crisis management has been embedded
in the DNA of companies and enterprises for more than a century. Over time,
companies have become quite comfortable with and capable of managing the risks
they understand, whether they are financial, legal or operational. They are
also adept at managing these risks if they become real or perceived crises or
disruptions.

However, organizations increasingly face a newer form of
risk: social risk. This risk can be defined as the exposure to adverse
consequences stemming from population-based activities and negative public
perception. In other words, social risk is a manifestation of what goes on
around us and is driven by influences inside every one of us—beliefs, emotions,
mental health, fears and anxieties.

Social risk’s population-based nature sets it apart from
traditional risk events such as cyberattacks, workplace safety incidents,
corporate malfeasance and natural disasters. Traditional risk events impact a
discrete set of people, while social risk can impact broad segments of society.

The Five Characteristics of Social Risk

Research by social risk advisory firm ENODO Global and
reputation and crisis management firm Kith identified five characteristics of
social risk:

1. Human. Unlike traditional forms of risk that most
often manifest themselves because of a discrete event or incident, social risk
is built on who we are as human beings and shaped by our economic status,
social mobility, community environment and mental health.

2. Dynamic. Social risk is formed by how people react
to events and ideas and thus it is always evolving. For example, social risk is
not necessarily the pervasive nature of socio-economic disparities in the
global economy—it is the population-based reactions to those disparities.

3. Dispersed. Social risk is an outgrowth of today’s
connected society where nearly everyone has the ability to amplify their voice
through technology and networks of family, friends, colleagues and social media
followers.

4. Distinctive. Social risk is unique to each
organization. Because social risk forms as humans organically react to events
and ideas, no two social risk events are alike.

5. Scalable. Because social media platforms amplify
public conversations accelerate social risk, it can scale very quickly from an
isolated idea or conversation into a broader movement. 

Social Risk in Action

In late January, wild speculation around the previously
moribund video game retailer GameStop caused its stock prices to soar by 1,500%
over the course of two weeks. The surge involved all kinds of market actors,
including large and small investors, hedge funds, and trading platforms like
consumer brokerage Robinhood. The run-up in GameStop’s share price has been
treated like an outgrowth of market risk. The incident even prompted federal
regulators and prosecutors to investigate whether market manipulation or other
types of criminal misconduct were behind the rapid increase.

While prosecutors absolutely must investigate and prosecute
wrongdoing, that may be akin to treating the symptoms of an illness rather than
seeking a cure for it. Many GameStop investors were not driven by perceptions
of risk or opportunity in the market. No one invested in the company because
they believed its market value would soon rival that of Apple or Tesla.
Instead, the actions of many investors in GameStop were symptoms of social
risk—people lashing out against dominant institutions in society because they
believe those institutions either no longer serve them or may actively work
against their interests.

“The GameStop speculators are not merely in a frenzy about
one stock,” wrote Sebastian Mallaby, an economist at the Council on Foreign
Relations and columnist for the Washington Post. “Their goal is to
destroy the traders who link stock prices to fair value.” Essentially, their
behavior was driven by a social risk, which then triggered market risk.

Recommendations to Mitigate Social Risk

Given the broad and pervasive nature of social risk, it is
folly to think any corporation is immune. Any organization, institution or
individual can be its next target. Leaders can nonetheless take steps to be
better prepared for social risk, see it coming, and react to it before it
becomes a true crisis that plays out in public. These five recommendations can
help identify and mitigate social risk:

1. Know who you are and what you stand for. By understanding
its core values and establishing a chain of command that respects those values,
an organization can respond to social risk with speed, clarity and confidence.

2. Create an ecosystem of diverse partners. A diverse
ecosystem will create an “early warning system” to help identify social risk
before it manifests as a threat or crisis—­provided you stay engaged with this
ecosystem in a genuine dialogue.

3. Ask, don’t tell. When developing a social risk
management strategy, getting honest feedback can help you avoid pitfalls and
build credibility. Similar to engaging partners, this must be approached by
listening rather than telling.

4. Communicate constantly. In an age of social risk,
communicating is not about pushing information to audiences. Rather, it is a
methodical approach to all facets of a communications strategy that fosters
dialogue.

5. Act with humanity. Social risk is driven by human
emotions that must be respected and appreciated. This is the difference between
electric scooter-sharing start-up Bird laying off 400 employees in a Zoom call
during the early days of COVID-19 and Valencia College’s administrators calling
each of their 40,000 students just to check in on them.

A New Approach

Social risk is far too pervasive and diverse for any single
company, political institution or leader to stop. Companies must be very
careful in relying on the traditional crisis playbook of “Acknowledge,
Apologize, Act,” where you seek to make amends to the audiences most impacted
by the incident or chain of events. Social risk is too broad for that.

Addressing social risk requires looking at its causes from a
systemic standpoint, not on an event-by-event basis. The solutions must be
focused on the same societal level as its causes, including poverty, injustice,
isolation due to the pandemic and mental health challenges.

However, executives and leaders can mitigate social risk’s
worst effects and impacts on corporate reputation if they acknowledge its
existence, that it touches all of society, and that it comes from the
perceptions and beliefs all of us have. By seeking solutions and committing to
changing the status quo and attaining a higher degree of empathetic engagement
with important audiences and partners, social risk can be addressed more effectively.

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