The latest episode of “CEOs Behaving Badly” reminded me that I’ve been meaning to blog about this Stanford article, which says many emerging risks faced by companies in the social media age fall under the heading of “social risk.” According to the article, social risk is:

A loosely defined term that describes events that impair a company’s social capital. We can distinguish it from other risks in that the primary  cause of damage is reputational, whereby an incident harms reputation and, subsequently, performance. In some cases, the risk event involves an interaction with the company’s products or services; in others, it is wholly unrelated to the company’s products and involves actions, decisions, or statements by a company affiliate. Either way, media attention (social or traditional) amplifies the impact, sparking a backlash that extends well beyond the directly affected parties.

The article offers up a couple of well-known incidents involving social risks – United Airlines’ heavy-handed removal of a passenger from an overbooked flight in 2017, and the fallout from “Papa John” Schnatter’s criticism of NFL player national anthem protests that same year.

The damage social risk inflicts on corporations is unpredictable – an event causing significant damage to one company might pass with little impact on another. That makes it difficult for management to gauge the impact of such an event at its outset. Furthermore, many social risk events appear immaterial from a financial standpoint. These factors make social risks difficult to identify and plan for under standard risk management frameworks. However, the article does have some specific suggestions about how companies may better position themselves to respond to these risks:

– Use knowledge of the past to inform future plans. Companies can accomplish this by examining social risk events that have impacted peer groups and related industries. By developing a comprehensive history of social risk, management and boards can understand the variety of potential risks it faces and evaluate patterns in how risk events have evolved over time.

– Conduct scenario planning to identify the highest likelihood risk events. This involves identifying events that are most likely to manifest themselves based on the company’s industry, profile, and vulnerabilities. Quantify the severity by looking at the potential impact on brand, product, suppliers, employees, and overall reputation.

– Prepare responses and identify the resources necessary to prevent or mitigate the highest likelihood risks. Consider both preventative and responsive measures, over both short-term and long-term time horizons, and develop resources, programs, and policies to protect the company on an ongoing basis.

The article highlights the fact that many social risk events have a cultural or leadership component to them, and that it is incumbent on the board to evaluate how the company’s culture and leadership may influence its risk profile in this area, and to take appropriate action if those factors are deemed to increase risk.

– John Jenkins

When it comes to short reports, the news is usually about the shortcomings of a company that’s had a target painted on its back. But a NYSE-listed REIT recently turned the tables on the author of a dubious short report. The guy published his stuff under the pseudonym “Rota Fortunae,” which those of you who paid attention in Latin class know means “The Wheel of Fortune.”  Check out this recent Reuters article:

A small Texas investor who caused shares of a real estate investment trust to plunge 39 percent in a day has agreed to pay the company restitution to settle a lawsuit against him, a rare development that could embolden other companies to pursue such claims. Quinton Mathews, who published his research on companies online under the pseudonym Rota Fortunae, will pay Farmland Partners Inc (FPI.N) “a multiple” of the profits on his short bet in 2018, according to the terms of the legal settlement announced late Sunday. His research had helped wipe as much as $115 million off Farmland’s market value.

The parties declined requests for comment on the exact value of the settlement.

Mathews conceded that “many of the key statements” in a report he published on website Seeking Alpha targeting Farmland – including allegations of dubious related-party transactions and the risk of insolvency – were wrong. “I regret any harm the article and its inaccuracies caused,” Mathews said in the announcement, which was posted on Twitter and Seeking Alpha.

Given his pseudonym, I think my fellow liberal arts majors will agree that Mr. “Fortunae” may find solace from the philosopher Boethius in his time of financial distress. Anyway, the faulty research report was allegedly paid for by a hedge fund, which denies any involvement. According to the article, litigation between the company and that hedge fund is continuing.

– John Jenkins

We have posted the July issue of our complimentary monthly email newsletter. Sign up today to receive it by simply entering your email address.

– John Jenkins