Understanding and Mitigating Social Risk

Robert Ludke


April 1, 2021

The practice of risk and crisis management has been embedded in the DNA of companies and enterprises for more than a century. Over time, companies have become quite comfortable with and capable of managing the risks they understand, whether they are financial, legal or operational. They are also adept at managing these risks if they become real or perceived crises or disruptions.

However, organizations increasingly face a newer form of risk: social risk. This risk can be defined as the exposure to adverse consequences stemming from population-based activities and negative public perception. In other words, social risk is a manifestation of what goes on around us and is driven by influences inside every one of us—beliefs, emotions, mental health, fears and anxieties.

Social risk’s population-based nature sets it apart from traditional risk events such as cyberattacks, workplace safety incidents, corporate malfeasance and natural disasters. Traditional risk events impact a discrete set of people, while social risk can impact broad segments of society.

The Five Characteristics of Social Risk

Research by social risk advisory firm ENODO Global and reputation and crisis management firm Kith identified five characteristics of social risk:

1. Human. Unlike traditional forms of risk that most often manifest themselves because of a discrete event or incident, social risk is built on who we are as human beings and shaped by our economic status, social mobility, community environment and mental health.

2. Dynamic. Social risk is formed by how people react to events and ideas and thus it is always evolving. For example, social risk is not necessarily the pervasive nature of socio-economic disparities in the global economy—it is the population-based reactions to those disparities.

3. Dispersed. Social risk is an outgrowth of today’s connected society where nearly everyone has the ability to amplify their voice through technology and networks of family, friends, colleagues and social media followers.

4. Distinctive. Social risk is unique to each organization. Because social risk forms as humans organically react to events and ideas, no two social risk events are alike.

5. Scalable. Because social media platforms amplify public conversations accelerate social risk, it can scale very quickly from an isolated idea or conversation into a broader movement. 

Social Risk in Action

In late January, wild speculation around the previously moribund video game retailer GameStop caused its stock prices to soar by 1,500% over the course of two weeks. The surge involved all kinds of market actors, including large and small investors, hedge funds, and trading platforms like consumer brokerage Robinhood. The run-up in GameStop’s share price has been treated like an outgrowth of market risk. The incident even prompted federal regulators and prosecutors to investigate whether market manipulation or other types of criminal misconduct were behind the rapid increase.

While prosecutors absolutely must investigate and prosecute wrongdoing, that may be akin to treating the symptoms of an illness rather than seeking a cure for it. Many GameStop investors were not driven by perceptions of risk or opportunity in the market. No one invested in the company because they believed its market value would soon rival that of Apple or Tesla. Instead, the actions of many investors in GameStop were symptoms of social risk—people lashing out against dominant institutions in society because they believe those institutions either no longer serve them or may actively work against their interests.

“The GameStop speculators are not merely in a frenzy about one stock,” wrote Sebastian Mallaby, an economist at the Council on Foreign Relations and columnist for the Washington Post. “Their goal is to destroy the traders who link stock prices to fair value.” Essentially, their behavior was driven by a social risk, which then triggered market risk.

Recommendations to Mitigate Social Risk

Given the broad and pervasive nature of social risk, it is folly to think any corporation is immune. Any organization, institution or individual can be its next target. Leaders can nonetheless take steps to be better prepared for social risk, see it coming, and react to it before it becomes a true crisis that plays out in public. These five recommendations can help identify and mitigate social risk:

1. Know who you are and what you stand for. By understanding its core values and establishing a chain of command that respects those values, an organization can respond to social risk with speed, clarity and confidence.

2. Create an ecosystem of diverse partners. A diverse ecosystem will create an “early warning system” to help identify social risk before it manifests as a threat or crisis—­provided you stay engaged with this ecosystem in a genuine dialogue.

3. Ask, don’t tell. When developing a social risk management strategy, getting honest feedback can help you avoid pitfalls and build credibility. Similar to engaging partners, this must be approached by listening rather than telling.

4. Communicate constantly. In an age of social risk, communicating is not about pushing information to audiences. Rather, it is a methodical approach to all facets of a communications strategy that fosters dialogue.

5. Act with humanity. Social risk is driven by human emotions that must be respected and appreciated. This is the difference between electric scooter-sharing start-up Bird laying off 400 employees in a Zoom call during the early days of COVID-19 and Valencia College’s administrators calling each of their 40,000 students just to check in on them.

A New Approach

Social risk is far too pervasive and diverse for any single company, political institution or leader to stop. Companies must be very careful in relying on the traditional crisis playbook of “Acknowledge, Apologize, Act,” where you seek to make amends to the audiences most impacted by the incident or chain of events. Social risk is too broad for that.

Addressing social risk requires looking at its causes from a systemic standpoint, not on an event-by-event basis. The solutions must be focused on the same societal level as its causes, including poverty, injustice, isolation due to the pandemic and mental health challenges.

However, executives and leaders can mitigate social risk’s worst effects and impacts on corporate reputation if they acknowledge its existence, that it touches all of society, and that it comes from the perceptions and beliefs all of us have. By seeking solutions and committing to changing the status quo and attaining a higher degree of empathetic engagement with important audiences and partners, social risk can be addressed more effectively.

Robert Ludke is a senior advisor at crisis communications firm Kith and is part of the network of experts at RANE, Risk Assistance, Network + Exchange.