Companies and brands are operating on terrain fraught with socio-economic risk. We’ve now seen countless risk event crises: Pepsico, Kentucky Fried Chicken, Morgan Stanley, Papa John’s Pizza, and many more. Among the new understandings emerging from MSA’s close study of socio-economic risk is that companies can face an escalating threat continuum when confronted with a marketing-focused or governance risk event. The reputational and financial costs to companies can be extreme: The Weinstein Company, once valued at over $2 Billion has gone bankrupt (February, 2018) and Facebook’s data privacy missteps have shaved over $50 Billion in market value (March, 2018).
This underscores how important and vital it is for companies to assess their risk exposures, prioritize their response to likely risks, conduct advance planning to ensure effective responses, and to monitor the threat landscape for potential early signals of a developing risk situation.
The 5-Stage “Threat Continuum” outlined here helps to define the escalation of socio-economic risk events in specific phases, and further helps to illustrate how risks catalyze and grow into serious threats. Here’s the Threat Continuum associated with socio-economic risk defined and itemized:
Stage Zero. This stage represents the common steady-state company operating condition. There is no “active” threat, but socio-economic risk is present as many companies have adopted the role of potential political/social actors. A host of factors have contributed to this general environment, ranging from a bifurcated media and cultural landscape, the Supreme Court’s affirmation of the personhood status of corporations, and the consequence-free power of social media being used by activist consumers. In this environment, “business as usual” is harder than ever.
Stage 1. Often characterized by, but not limited to, a messaging scenario whereby a company clumsily touches on or addresses a socio-economic issue. This threat stage usually remains confined to the media (digital/social and traditional), can threaten uncommitted consumer activism, and lasts across multiple news cycles. These events are sometimes effectively addressed through a company values-based public apology.
Stage 2. This stage is often an escalation of Stage 1, and also includes committed consumer activism. Typically, a company will have gone beyond expressing an opinion to taking a specific action or advocating on behalf of a particular stance regarding a socio-economic issue. This can invite corresponding action by customers, the public, or stakeholders who disagree. Boycotts, “buycotts,” advertising cancellations, etc. can result. These situations can be diffused when the company acknowledges consumer concerns and takes steps to reverse its action.
Stage 3. This stage features material threats characterized by third-party interventions. These include external actions by governmental regulatory bodies, lawsuits filed by shareholders or class action filings, annulments of standing company partnerships or agreements and additional assertive actions. Typically, these events damage or weaken a company’s reputation, and often result in valuation drawdowns.
Stage 4. These are extreme threat circumstances. Companies experiencing Stage 4 risk events suffer serious reputational damage and severe valuation impairments. Typically these events pose a danger to a company’s essential products or business model by revealing the company to be a “bad actor” towards vital constituents and/or stakeholders, or to be potentially violating operating procedures, or even the law. Some firms experiencing a Stage 4 risk event, like The Weinstein Company, file for bankruptcy and go out of business all-together.
To illustrate how risks escalate to drive a firm into increased threat stages, consider the timely case of Facebook. Prior to the election of 2016 Facebook had occasionally run afoul of its users, particularly when harvesting and selling their data. Nevertheless, Facebook was able to follow a playbook of avoiding directly addressing these concerns (Stage 0). However, after the election, it was revealed that foreign actors had used Facebook data to target users. Again, Facebook employed previously effective tactics and downplayed these revelations, eventually offering a corporate mea culpa (Stage 1). But new revelations continued to emerge: a data analytics firm linked to the Trump campaign had easily breached Facebook’s data protection policies and this violated Facebook brand identity (a safe and friendly space to connect with friends and share information). This circumstance metastasized into blaring headlines and viral social media commentary leading to calls for users to delete their Facebook accounts and for advertisers to pull their ads from the platform (Stage 2). Now, over the course the first few months of 2018, the US Congress and UK Parliament have demanded that Facebook testify about their data management policies, the US Federal Trade Commission (FTC) is investigating the company for privacy abuses, and 37 US State Attorneys General have also demanded testimony (Stage 3).
We’re sure that Facebook hopes the threat escalation ends here.
With the introduction of the Threat Continuum, we can better understand the nature of socio-economic risk now faced by corporations. With the catalyst of social media, brand risk events have a potential to metastasize quickly into extreme events carrying company value and reputational costs that can be severe. In this environment, socio-economic risk forms a terrain calling for careful and systematic assessment.
Where is your firm on the “Threat Continuum?” As illustrated by the examples above, it’s time for concrete answers to this increasingly serious question.
MSA co-authored this article with market researcher James Harn, PhD.