Times Square New York City

Social Risk: Does Your Company Know its Social Footprint?

April 26, 2019

Corporate missteps instantly starring in viral tweets are now familiar scenes—Starbucks’ restroom policy, Under Armour’s revised strip joint expense policy, Google employee global walkouts to name a recent few.

These corporate “moments” are signature features in doing business in a new social landscape, and they share a common ground: the public’s focus on the company behind its products and the social impact of its policies, strategies or even its business model.

Two new normals for business are turbocharging this focus:

  • Eroded control of the corporate narrative. Companies must now co-create their narrative with web-empowered citizen journalists, unlimited by time or geography, ready to disrupt business by instantly sharing their experiences, particularly when that experience does not meet their expectations.
  • High expectations. The decades-long erosion of trust in institutions is old news. What’s new is simultaneously high expectations: 94 percent of respondents in 14 of the world’s largest economies believe companies can shape a better society. They recognize that, unlike gridlocked governments, businesses don’t need to pass legislation to make positive change. Ignoring these expectations can mean losing customer preference and the competitive arms race for the next generation of talent as baby boomers retire at the rate of 10,000 per day.

Together, these new normals have joined forces to create a new category of enterprise risk: Social Risk.

Just as every company has a carbon footprint, it also has a social footprint, the ‘S’ factor in Environment, Social and Governance (ESG). How that ‘S’ should be measured is still evolving, but a company’s social impact is real and getting it wrong is a material risk for any organization.

Many companies are now embracing a broader corporate purpose that aligns their profitable strategies with a greater social good. But for a web-enabled activist public, the proof of a corporate purpose is in actions taken, not commitments made. What a company does—all of its actions—is the authentic content for what it says.

When companies declare a greater corporate purpose but their boards or management lack diversity, or their pay and promotion track record shows chronic gender and race equity issues, or they fail to address workplace harassment, they risk employees and investors disrupting their business. When companies lack the social IQ to anticipate their negative stakeholder impact, they risk not just viral moments, but shareholder petitions, Congressional hearings, increased regulation or litigation.

Social risk is serious business.

How do corporations increase their social IQ to preempt their social risk?

  1. Break Through Corporate Blind Spots

Rather than bad luck or random events, more than 70 percent of headline-producing crises arise from slow burning issues within management’s control.

If most of these disruptions are self-inflicted, why don’t corporations see them coming?

No one should ever underestimate the insulating power of the corporate cultural bubble. Breaking through that bubble does not come naturally. It requires an agility in leadership and culture

  • C-suite leaders who role model, cultivate and reward divergent points of view
  • A “speak up” culture cultivated throughout the management chain and augmented with trusted feedback/whistleblower systems

As one corporate executive put it, “We know many of our business risks. It is the ones we DON’T know about that concern us.”

  1. Learn from Embedded Inherent Negatives

Every company—even those that are progressive leaders in their space—has inherent negatives embedded in their business model, strategies or policies. As the company grows, so too do opportunities for negative stakeholder impacts. Growing and profiting while expanding negative impact makes inherent negatives a powerful accelerant for disruptive public outrage.

Stepping outside of the corporate culture to anticipate those inherent negatives is difficult. But left unaddressed, a web-savvy public will showcase its negative impact in a social media minute. When that happens, a strategic surprise becomes a painfully blinding glimpse of the obvious.

Starbucks’ progressive track record on employment policies and sourcing coffee didn’t shield them from becoming a social outrage epicenter. A manager in one of its Philadelphia stores enforced the company’s restroom policy by refusing access to two African American men who had made no purchase while waiting for a friend. The escalating confrontation was seen worldwide on social and mainstream media, leading Starbucks to close 8,000 company-owned U.S. stores during a training for 170,000 employees on racial tolerance.

Less visible but critically important was Starbucks Executive Chairman Howard Schultz’ candid recognition of management’s self-inflicted responsibility for the outrage: “The company, the management and me personally—not the store manager—are culpable and responsible. We’re the ones to blame.”

  1. Innovate the “S” in ESG

The Starbucks example is not an outlier. Many Silicon Valley enterprises are facing the disruptive consequences of business models that build scale first and address social impact later. Facebook and JUUL are classic examples. Now companies adopting new technologies like facial recognition or autonomous vehicles are hitting the pause button to address the social impact.

Beyond the social impact of new technology, in 2018, the New York Times profiled 201 jobs or major roles brought down by #MeToo cases in less than one year. Given data on the frequency of sexual harassment, why would any company believe they are the exception and act only after they are confronted?

Social risk was also a material factor in Amazon’s withdrawal from the Queens site in New York City for their second North American headquarters after facing extensive backlash.

Contrast Amazon’s lottery-style site selection with Shell’s innovative Non-Technical Risk assessment process. Shell requires that stakeholder interests and concerns be ascertained before management deems a project viable. Per Shell, “Non-technical risks are the most common cause of project delays and most likely to be underestimated and overlooked but have the potential to cause significant erosions in project value…”

Building the License to Operate and the License to Grow

To credibly withstand today’s unrelenting public scrutiny, a sustainable corporate purpose must align with the company’s entire footprint as a way of doing business, not just with its discreet initiatives for social good. And increasingly, that scrutiny is coming from investors who have recognized the sustained financial track record of firms materially improving their performance in material ESG dimensions.

Companies that integrate social risk into their strategic planning and operational management, and engage external partners with a track record in breaking through blind spots, will earn the license to sustainably operate in this new landscape. They will build a license to grow by discovering profitable opportunities for shared solutions to pressing social needs.

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