8/2/2019 CGRP25 - Monitoring Risks Before They Go Viral: Is it
Time for the Board to Embrace Social Media?
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Topics, Issues, and Controversies in Corporate Governance and
Leadership
S T A N F O R D C L O S E R L O O K S E R I E S
stanford closer look series 1
Monitoring Risks before They Go Viral:Is It Time for the Board
to Embrace
Social Media?
IntroductIon
According to Nielsen, social networks and blogs
account or 23 percent o the time that individu-
als spend online, more than email and reading the
news.1 While the vast majority o consumers (89
percent) use search engines to research products
and services that they are interested in purchasing,
it is perhaps surprising that 42 percent ollow or
like a brand on a social networking website.2
Given the pervasiveness o social media and the
potential impact it can have on corporate activities,
some experts recommend that boards o directors
pay closer attention to the inormation exchanged
on these sites. For example, consultant Fay Feeney
argues that boards need to adapt to a connected
world where listening, disclosure, transparency and
engaging is expected.
3
She advocates that boardsembrace social media as a means o
connecting with
and engaging in dialogue with corporate stakehold-
ers. Similarly, as consultant Lucy Marcus explains:
Te reality is that social media exists. Its not
separate rom everything we do. She argues that
i boards are not engaged in social media, then dis-
cussions will take place that they are not a part o
and they are not engaged in.4 Tis can lead to the
dissemination o actually erroneous inormation
or rumors that a company will have diculty cor-
recting.Tere are several reasons why the board might
nd the inormation provided through social media
to be valuable. First, directors are responsible or
oversight o the corporation. Tis includes moni-
toring and advising the senior executive team as it
develops and implements the corporate strategy. In-
ormation gleaned through social media might pro-
vide unique and relevant insights into the success
By dv f. l, sh M. l B ty
ap 5, 2012
o these eorts and supplement the traditional ke
perormance indicators (KPIs) that directors use t
evaluate management and award bonuses.5 Procte
& Gamble has taken such an approach. Te com
pany has developed a dashboard that uses Bayes
ian analysis to scan blogs, tweets, and other socia
media to summarize consumer sentiment abou
its products and measure brand strength. Chair
man and CEO Robert McDonald personally re
views all inormation that relates to the corporat
brand.6 Tere are several o-the-shel product
that companies can purchase to collect similar data
although a company might want to customize thes
products to meet its specic needs (see Exhibit 1).
Second, inormation gathered through socia
media might alert the board to risks acing the or
ganization in a way that is not currently availableTese risks
might include:
Operational risk: how exposed the company is t
disruptions in its operations.
Reputational risk: how protected are the com
panys brands and corporate reputation.
Compliance risk: how eectively the company
complies with laws and regulations.
Tere is some evidence that social media pro
vides eective early warning in these areas. For ex
ample, in online message boards anonymous ElLilly sales
representatives discussed the practice o
selling Zyprexa (an antipsychotic medicine) o
label or the treatment o dementia months beor
the news broke in the mainstream media. Similarly
Nestl rst came under criticism in online commu
nities or sourcing palm oil (a main ingredient in
many o its products, including Kit Kat and Nestl
Crunch candy bars) rom an Indonesian supplie
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Time for the Board to Embrace Social Media?
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stanford closer look series 2
Monitoring risks before they go Viral: is it tiMe for the board
to eMbrace social Media?
accused o destroying rainorests. Te company was
eventually orced to issue a public apology and re-
structure its supply chain to source rom sustain-
able providers. Had the boards o these companies
been monitoring the discussion online, both might
have been alerted earlier to these risks and moved
proactively to address them. In this way, inorma-
tion gathered through social media can supplement
the data provided by management regarding key
risk actors acing an organization (see Exhibit 2).
Survey evidence suggests that many manage-
ment teams would welcome the participation o the
board in a discussion about social media. According
to a Deloitte study, 58 percent o executives believe
that reputational risk associated with social media
should be a board room issue. Only 17 percent o
companies currently have a program in place to
capture this data.8
Still, there are reasons why the board o directors
might not want to have access to this inormation.
First, the responsibilities o the board o directors
are separate rom those o management. Directors
are expected to advise on corporate strategy, the
business model, and risk management, but they are
not expected to handle these activities themselves.
Reviewing detailed inormation rom social media
aggregation providers might encroach too closely
on activities under managements purview. Second,in perorming its
monitoring obligations, the law
explicitly provides that the board may rely on inor-
mation urnished by management. Unless there are
obvious red fags regarding the trustworthiness o
management, the board o directors is not expected
to develop alternative means o inorming its deci-
sions. o this end, the board o directors might not
want to review inormation rom social media un-
less it is provided by management. Tird, the inor-
mation captured through social media might not be
accurate. Directors might eel compelled to act onnegative
inormation, even i it is not representative
o the general sentiment o stakeholders, because
ailure to respond would expose them to legal li-
ability. Finally, directors might be encouraged to
engage directly with stakeholders. Tere are several
examples o CEOs engaging in social media only
to have their actions backre.9 Directors might be
wary o repeating these mistakes.
Why thIs Matters
1. Social media introduces a new level o detail and
complexity to inormation gathering regardin
a company and its stakeholders. Why haven
more boards o directors made certain that man
agement has a process in place or collecting
analyzing, and responding to this inormation
Do boards actually know what questions to ask
Can boards distinguish between a good system
or monitoring social media and a bad one?
2. Te examples above suggest that social medi
can provide early warning o risks acing an orga
nization. Should the board ormally review thi
inormation, or does this represent an encroach
ment on managerial prerogative? Which socia
media metrics should be presented to the board
and which excluded? Where do the responsibili
ties o the board end and those o managemen
begin?
3. One important task o the board is to monito
organizational reputation. How is this currently
done? Should overall sentiment derived rom
social media sources be a primary input in thi
analysis?
1 Nielsen, State o the Media: Te Social Media Report. Q3 2011.2
Sample consists o internet users and thereore might not be rep
resentative o general population. Source: Fleishman Hillard,
201
Digital Infuence Index Annual Global Study.3 Fay Feeney, Leading
a Board at the Speed o Instant, Te Corpo
rate Board, March/April 2011.4 Interview with Lucy P. Marcus,
Why Boards Need to Adopt Soci
Media, Reuters, March 22, 2012.5 Tis is particularly useul or
nonnancial perormance measures
such as employee satisaction, customer satisaction, supplier
reputation, product/service ailure, and product innovationthat are
di
cult to measure.6 Robert McDonald, Inside P&Gs Digital
Revolution, McKins
Quarterly, November 2011.7 Examples include Sysomos, Converseon,
ListenLogic, Scout Lab
NM Incite, Cymony, Synthesio, Radian6, and Visible echnologies.
In general, these companies or products provide metrics aroun
company avorability, infuencers, topics and themes about a
com
pany and its competitors, positive/negative sentiment, text
analytic
geography, and demographics.8 Deloitte, 2009 Ethics and
Workplace Survey.9 For example, in 2007, John Mackey, CEO o Whole
Foods, cam
under re or regularly making anonymous posts on Yahoo!
Financmessage boards. While an SEC investigation cleared Mackey
o
wrongdoing because he did not prot rom his actions, the boar
o directors modied the companys code o conduct to bar
seniomanagement and directors rom making posts about the
company
its competitors or vendors on unsponsored websites. See
Andrew
Martin, Whole Foods Executive Used Alias, Te New York imeJuly
12, 2007; and David Kesmodel and Jonathan Eig, Unravelin
