Monitoring Risks Before They Go Viral: Is it Time for the Board to Embrace Social Media?


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Monitoring Risks Before They Go Viral: Is it Time for the Board to Embrace Social Media?
Authors: Professor David F. Larcker, Sarah M. Larcker and Brian Tayan, Researcher, Corporate Governance Research Program, Stanford Graduate School of Business.
Published: April 5, 2012

According to Nielsen, social networks and blogs account for the largest percentage of time that individuals spend online, more than email and reading the news. Given the pervasiveness of social media and the potential impact it can have on corporate activities, some experts recommend that boards of directors pay closer attention to the information exchanged on these sites.

Information gleaned through social media might provide unique and relevant insights that improve decision making. For example, this information might be used to supplement the traditional key performance indicators that boards use to monitor corporate performance. Similarly, it might also be used as an “early warning” system to improve risk management.

In this closer look, we examine these issues in detail. We ask:

Why haven’t more boards utilized information from social media to improve corporate oversight?
Should the board formally review social media metrics, or does this represent an encroachment on management?

Can this information be used to safeguard corporate reputation?
Read the attached Closer Look and let us know what you think!

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Monitoring Risks Before They Go Viral: Is it Time for the Board to Embrace Social Media?

  1. 1. 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 for 23 percent of the time that individu- als spend online, more than email and reading the news.1 While the vast majority of consumers (89 percent) use search engines to research products and services that they are interested in purchasing, it is perhaps surprising that 42 percent follow or “like” a brand on a social networking website.2 Given the pervasiveness of social media and the potential impact it can have on corporate activities, some experts recommend that boards of directors pay closer attention to the information 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 boards embrace social media as a means of connecting with and engaging in dialogue with corporate stakehold- ers. Similarly, as consultant Lucy Marcus explains: “The reality is that social media exists. It’s not separate from everything we do.” She argues that if boards are not engaged in social media, then dis- cussions will take place “that they are not a part of and they are not engaged in.”4 This can lead to the dissemination of factually erroneous information or rumors that a company will have difficulty cor- recting. There are several reasons why the board might find the information provided through social media to be valuable. First, directors are responsible for oversight of the corporation. This includes moni- toring and advising the senior executive team as it develops and implements the corporate strategy. In- formation gleaned through social media might pro- vide unique and relevant insights into the success By David F. Larcker, Sarah M. Larcker and Brian Tayan April 5, 2012 of these efforts and supplement the traditional key performance indicators (KPIs) that directors use to evaluate management and award bonuses.5 Procter & Gamble has taken such an approach. The com- pany has developed a dashboard that uses Bayes- ian analysis to scan blogs, tweets, and other social media to summarize consumer sentiment about its products and measure brand strength. Chair- man and CEO Robert McDonald personally re- views all information that relates to the corporate brand.6 There are several “off-the-shelf” products that companies can purchase to collect similar data, although a company might want to customize these products to meet its specific needs (see Exhibit 1).7 Second, information gathered through social media might alert the board to risks facing the or- ganization in a way that is not currently available. These risks might include: • Operational risk: how exposed the company is to disruptions in its operations. • Reputational risk: how protected are the com- pany’s brands and corporate reputation. • Compliance risk: how effectively the company complies with laws and regulations. There is some evidence that social media pro- vides effective early warning in these areas. For ex- ample, in online message boards anonymous Eli Lilly sales representatives discussed the practice of selling Zyprexa (an antipsychotic medicine) off- label for the treatment of dementia months before the news broke in the mainstream media. Similarly, Nestlé first came under criticism in online commu- nities for sourcing palm oil (a main ingredient in many of its products, including Kit Kat and Nestlé Crunch candy bars) from an Indonesian supplier
  2. 2. stanford closer look series 2 Monitoring Risks before They Go Viral: Is It Time for the Board to Embrace Social Media? accused of destroying rainforests. The company was eventually forced to issue a public apology and re- structure its supply chain to source from sustain- able providers. Had the boards of 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, informa- tion gathered through social media can supplement the data provided by management regarding key risk factors facing an organization (see Exhibit 2). Survey evidence suggests that many manage- ment teams would welcome the participation of the board in a discussion about social media. According to a Deloitte study, 58 percent of executives believe that reputational risk associated with social media should be a board room issue. Only 17 percent of companies currently have a program in place to capture this data.8 Still, there are reasons why the board of directors might not want to have access to this information. First, the responsibilities of the board of directors are separate from those of 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 information from social media aggregation providers might encroach too closely on activities under management’s purview. Second, in performing its monitoring obligations, the law explicitly provides that the board may rely on infor- mation furnished by management. Unless there are obvious “red flags” regarding the trustworthiness of management, the board of directors is not expected to develop alternative means of informing its deci- sions. To this end, the board of directors might not want to review information from social media un- less it is provided by management. Third, the infor- mation captured through social media might not be accurate. Directors might feel compelled to act on negative information, even if it is not representative of the general sentiment of stakeholders, because failure to respond would expose them to legal li- ability. Finally, directors might be encouraged to engage directly with stakeholders. There are several examples of CEOs engaging in social media only to have their actions backfire.9 Directors might be wary of repeating these mistakes. Why This Matters 1. Social media introduces a new level of detail and complexity to information gathering regarding a company and its stakeholders. Why haven’t more boards of directors made certain that man- agement has a process in place for collecting, analyzing, and responding to this information? Do boards actually know what questions to ask? Can boards distinguish between a good system for monitoring social media and a bad one? 2. The examples above suggest that social media can provide early warning of risks facing an orga- nization. Should the board formally review this information, or does this represent an encroach- ment on managerial prerogative? Which social media metrics should be presented to the board and which excluded? Where do the responsibili- ties of the board end and those of management begin? 3. One important task of the board is to monitor organizational reputation. How is this currently done? Should overall sentiment derived from social media sources be a primary input in this analysis?  1 Nielsen, State of the Media: The Social Media Report. Q3 2011. 2 Sample consists of internet users and therefore might not be rep- resentative of general population. Source: Fleishman Hillard, 2012 Digital Influence Index Annual Global Study. 3 Fay Feeney, “Leading a Board at the ‘Speed of Instant,’” The Corpo- rate Board, March/April 2011. 4 Interview with Lucy P. Marcus, “Why Boards Need to Adopt Social Media,” Reuters, March 22, 2012. 5 This is particularly useful for nonfinancial performance measures— such as employee satisfaction, customer satisfaction, supplier reputa- tion, product/service failure, and product innovation—that are dif- ficult to measure. 6 Robert McDonald, “Inside P&G’s Digital Revolution,” McKinsey Quarterly, November 2011. 7 Examples include Sysomos, Converseon, ListenLogic, Scout Labs, NM Incite, Cymfony, Synthesio, Radian6, and Visible Technolo- gies. In general, these companies or products provide metrics around company favorability, influencers, topics and themes about a com- pany and its competitors, positive/negative sentiment, text analytics, geography, and demographics. 8 Deloitte, 2009 Ethics and Workplace Survey. 9 For example, in 2007, John Mackey, CEO of Whole Foods, came under fire for regularly making anonymous posts on Yahoo! Finance message boards. While an SEC investigation cleared Mackey of wrongdoing because he did not profit from his actions, the board of directors modified the company’s code of conduct to bar senior management and directors from making posts about the company, its competitors or vendors on unsponsored websites. See Andrew Martin, “Whole Foods Executive Used Alias,” The New York Times, July 12, 2007; and David Kesmodel and Jonathan Eig, “Unraveling
  3. 3. stanford closer look series 3 Monitoring Risks before They Go Viral: Is It Time for the Board to Embrace Social Media? Rahodeb: A Grocer’s Brash Style Takes Unhealthy Turn,” The Wall Street Journal, July 20, 2007; and David Kesmodel, “Whole Foods Bars Executives from Web Forums,” The Wall Street Journal, Novem- ber 7, 2007. David Larcker is the Morgan Stanley Director of the Center for Leadership Development and Research at the Stanford Graduate School of Business and senior faculty member at the Rock Center for Corporate Governance at Stanford University. Sarah Larcker is Director of Account Planning at Digitas Health. Brian Tayan is a researcher with Stan- ford’s Center for Leadership Development and Research. David Larcker and Brian Tayan are coauthors of the books A Real Look at Real World Corporate Governance and Corporate Governance Matters. The authors would like to thank Michelle E. Gutman for research assistance in the preparation of these materials. The Stanford Closer Look Series is a collection of short case studies that explore topics, issues, and controversies in corporate governance and leadership. The Closer Look Series is published by the Center for Leadership Devel- opment and Research at the Stanford Graduate School of Business and the Rock Center for Corporate Gover- nance at Stanford University. For more information, visit: Copyright © 2012 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved.
  4. 4. stanford closer look series 4 Monitoring Risks before They Go Viral: Is It Time for the Board to Embrace Social Media? Exhibit 1 — Example of a Social Media Dashboard Source: The authors. 0 50 100 150 200 250 0 200 400 600 800 1000 1200 1/1/12 1/8/12 1/15/12 1/22/12 1/29/12 2/5/12 2/12/12 2/19/12 2/26/12 3/4/12 3/11/12 3/18/12 3/25/12 Daily Volume Category Mentions Brand A Mentions Competitor Mentions 305 152 188 341 475 915 530 Need Features Availability Price Packaging Quality Effectiveness % Posts 15.6% 34.4% 50.0% Stage Pre-purchase Point of Sale Post-purchase Life Cycle Data Lifestyle Impact, 32.5% Out of Pocket Costs, 17.6% Effective ness, 28.1% Side Effects, 4.6% Switch- ing, 17.2% Online Discussion Themes Description of Themes LifestyleImpact Opinion posts regarding impact on quality of life or ability to perform tasks Out of Pocket Costs Direct mention of costs associated with product Effectiveness Opinions about effectiveness of product Side Effects Posts about the unintended consequences of product use Switching Mentions of past or present switching between brands or the desire to switch 30.7% 2.3% 6.4% 18.9% 0.8% 1.0% 39.9% White Black Asian Latino Indian Other Unknown Demographics:Share of Voice Negative Positive Overall Sentiment Data provider can “listen” for company or product name. Changes in discussion volume and sentiment can be moni- tored around key events, both those planned by the com- pany (such as product launch or marketing event) and those that are unexpected (such as news story or crisis). Online discussion is bucketed around topic groups through linguistic modeling, looking at verbal cues to estimate who the speaker is. Data provider will mine discussion for main topic categories. Discussions can also be bucketed around themes. It is equally impor- tant for a company to have the capa- bility to drill down into the data and get an explanation for “why” certain themes are emerging. The company can intervene upon the emergence of negative themes. Sentiment meters can be devised for each stakeholder group: customers, suppliers, employees, investors, etc – based on forum in which discussions take place or comment themes. Sen- timent can also be tracked over time. Demographic data is estimated based on verbal cues and refer- ences, although sometimes demo- graphic data can be supplied, such as through Facebook.
  5. 5. stanford closer look series 5 Monitoring Risks before They Go Viral: Is It Time for the Board to Embrace Social Media? Exhibit 2 — Potential for Social Media to Supplement Board Information Source: The authors. Disclosed Risk Factors (Form 10-K) • Industry • Competition • Customers • Suppliers • Compliance • Etc. Social Media Dashboard Management Provided Information • Strategy reports • Performance metrics • Internal audit • Internal controls • Legal reviews • Etc.Gap Board = Ask Questions