Our concept of risk continues to broaden and now includes instances in which representatives of a company make statements, actions, or decisions that damage the firm by inviting public scrutiny, sparking a reaction among customers, employees, regulators, or the public. This risk, which we describe as “social risk,” is more amorphous than the standard risks included in a company’s risk-management framework — and harder to plan for. In this Closer Look, we use proprietary data from Marketing Scenario Analytica to examine how social risk manifests itself and what actions boards and companies can take to mitigate its impact. We ask: Given the sheer diversity of social risk, how can boards of directors prioritize their focus? How can a company gauge at the onset whether a social risk will be major or minor? What actions can senior officers take to mitigate the life of social risk? How can social risk be incorporated into risk management frameworks? What roles do management, audit, legal, and human resources play in this process? How can boards evaluate how company culture and leadership influence the risk profile of the company? What actions should they take if culture and leadership are deemed to increase risk?
Copyright held by David F. Larcker and Brian Tayan. Further inquiries about reproduction and use should be directed to the Corporate Governance Research Initiative.
