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CGRP-25 Monitoring Risks Before They Go Viral: Is it Time for the Board to Embrace Social Media?

CGRP-25 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!

To receive monthly alerts about the Closer Look series, please email the Stanford Corporate Governance Research Program at corpgovernance@gsb.stanford.edu. You can also follow more corporate governance news on Twitter: @StanfordCorpGov . To view the entire collection of Stanford Closer Looks please click here.
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!

To receive monthly alerts about the Closer Look series, please email the Stanford Corporate Governance Research Program at corpgovernance@gsb.stanford.edu. You can also follow more corporate governance news on Twitter: @StanfordCorpGov . To view the entire collection of Stanford Closer Looks please click here.

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07/24/2013

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Topics, Issues, and Controversies in Corporate Governance and Leadership
STANFORD CLOSER LOOK SERIES
stanford closer look series 1
Monitoring Risks before They Go Viral:Is It Time for the Board to EmbraceSocial Media?
IntroductIon
 According to Nielsen, social networks and blogsaccount or 23 percent o the time that individu-als spend online, more than email and reading thenews.
1
While the vast majority o consumers (89percent) use search engines to research productsand 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 thepotential impact it can have on corporate activities,some experts recommend that boards o directorspay closer attention to the inormation exchangedon these sites. For example, consultant Fay Feeney argues that “boards need to adapt to a connected world where listening, disclosure, transparency andengaging is expected.”
3
She advocates that boardsembrace social media as a means o connecting withand engaging in dialogue with corporate stakehold-ers. Similarly, as consultant Lucy Marcus explains:“Te reality is that social media exists. It’s notseparate rom everything we do.” She argues thati 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 thedissemination o actually erroneous inormationor rumors that a company will have diculty cor-recting.Tere are several reasons why the board mightnd the inormation provided through social media to be valuable. First, directors are responsible oroversight o the corporation. Tis includes moni-toring and advising the senior executive team as itdevelops and implements the corporate strategy. In-ormation gleaned through social media might pro-vide unique and relevant insights into the success
By dv f. l, sh M. l  B tyap 5, 2012
o these eorts and supplement the traditional key perormance indicators (KPIs) that directors use toevaluate management and award bonuses.
5
Procter& Gamble has taken such an approach. Te com-pany has developed a dashboard that uses Bayes-ian analysis to scan blogs, tweets, and other socialmedia to summarize consumer sentiment aboutits products and measure brand strength. Chair-man and CEO Robert McDonald personally re-views all inormation that relates to the corporatebrand.
6
Tere are several “o-the-shel” productsthat companies can purchase to collect similar data,although a company might want to customize theseproducts to meet its specic needs (see Exhibit 1).
7
 Second, inormation gathered through socialmedia might alert the board to risks acing the or-ganization in a way that is not currently available.Tese risks might include:
•
Operational risk: how exposed the company is todisruptions in its operations.
•
Reputational risk: how protected are the com-pany’s brands and corporate reputation.
•
Compliance risk: how eectively the company complies with laws and regulations.Tere is some evidence that social media pro-vides eective early warning in these areas. For ex-ample, in online message boards anonymous EliLilly sales representatives discussed the practice o selling Zyprexa (an antipsychotic medicine) o-label or the treatment o dementia months beorethe news broke in the mainstream media. Similarly,Nestlé rst came under criticism in online commu-nities or sourcing palm oil (a main ingredient inmany o its products, including Kit Kat and NestléCrunch candy bars) rom an Indonesian supplier
 
stanford closer look series 2
Monitoring risks before they go Viral: is it tiMe for the board to eMbrace social Media?
accused o destroying rainorests. Te company waseventually orced to issue a public apology and re-structure its supply chain to source rom sustain-able providers. Had the boards o these companiesbeen monitoring the discussion online, both mighthave been alerted earlier to these risks and movedproactively to address them. In this way, inorma-tion gathered through social media can supplementthe 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 theboard in a discussion about social media. According to a Deloitte study, 58 percent o executives believethat reputational risk associated with social media should be a board room issue. Only 17 percent o companies currently have a program in place tocapture this data.
8
Still, there are reasons why the board o directorsmight not want to have access to this inormation.First, the responsibilities o the board o directorsare separate rom those o management. Directorsare expected to advise on corporate strategy, thebusiness model, and risk management, but they arenot expected to handle these activities themselves.Reviewing detailed inormation rom social media aggregation providers might encroach too closely on activities under management’s purview. Second,in perorming its monitoring obligations, the law explicitly provides that the board may rely on inor-mation urnished by management. Unless there areobvious “red fags” regarding the trustworthiness o management, the board o directors is not expectedto develop alternative means o inorming its deci-sions. o this end, the board o directors might not want to review inormation rom social media un-less it is provided by management. Tird, the inor-mation captured through social media might not beaccurate. Directors might eel compelled to act onnegative inormation, even i it is not representativeo the general sentiment o stakeholders, becauseailure to respond would expose them to legal li-ability. Finally, directors might be encouraged toengage directly with stakeholders. Tere are severalexamples o CEOs engaging in social media only to have their actions backre.
9
Directors might be wary o repeating these mistakes.
Why thIs Matters
1. Social media introduces a new level o detail andcomplexity to inormation gathering regarding a company and its stakeholders. Why haven’tmore boards o directors made certain that man-agement has a process in place or collecting,analyzing, and responding to this inormation?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 media can provide early warning o risks acing an orga-nization. Should the board ormally review thisinormation, or does this represent an encroach-ment on managerial prerogative? Which socialmedia metrics should be presented to the boardand which excluded? Where do the responsibili-ties o the board end and those o managementbegin?3. One important task o the board is to monitororganizational reputation. How is this currently done? Should overall sentiment derived romsocial media sources be a primary input in thisanalysis?
1
Nielsen, State o the Media: Te Social Media Report. Q3 2011.
2
Sample consists o internet users and thereore might not be rep-resentative o general population. Source: Fleishman Hillard, 2012Digital 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 SocialMedia,”
Reuters 
, March 22, 2012.
5
Tis is particularly useul or nonnancial perormance measures—such as employee satisaction, customer satisaction, supplier reputa-tion, product/service ailure, and product innovation—that are di-cult 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, Cymony, Synthesio, Radian6, and Visible echnolo-gies. In general, these companies or products provide metrics aroundcompany avorability, infuencers, 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 o Whole Foods, cameunder re or regularly making anonymous posts on Yahoo! Financemessage boards. While an SEC investigation cleared Mackey o  wrongdoing because he did not prot rom his actions, the boardo directors modied the company’s code o conduct to bar seniormanagement 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 imes 
, July 12, 2007; and David Kesmodel and Jonathan Eig, “Unraveling 
 
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 akes Unhealthy urn,” 
he Wall Street Journal 
, July 20, 2007; and David Kesmodel, “Whole FoodsBars Executives rom Web Forums,”
Te Wall Street Journal 
, Novem-ber 7, 2007.
dv l h Mg sy d  h c lhp dvpm  rh  h sGu sh  Bu   uy mmb h r c  cp Gv  sUvy.sh l d  au Pg dg Hh.B ty  h wh s-’ c  lhp dvpm  rh.dv l  B ty  uh  h b

Corporate Governance Matters.
th uh wu  h Mh e. Gum  h   hpp  h m.th s c l s     h u h xp p, u,  v p gv  hp. th c ls  pubh by h c  lhp dv-pm  rh  h s Gu sh Bu  h r c  cp Gv-  s Uvy. f m m, v:hp://www.gb..u/.cpygh © 2012 by h B  tu  h ls Ju Uvy. a gh v.

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