Potential cost of damage to companies with compromised reputations keep board members up at night, according to a report.
There are many risks to a company’s bottom line, but reputational risk is emerging as a threat many executives are trying to deal with more aggressively. The Second Annual Board of Directors Survey 2011: Concerns About Risks Confronting Boards from EisnerAmper found that reputational risks are now a primary concern for board members.
According to board members polled in the report, ‘The issues facing American boards today include financial risk, privacy and data security, succession planning, regulatory changes and fraud. What the results make clear is that a company’s reputation is paramount and all risks threaten this fragile asset.’
New social networking sites are just the latest threat that makes keeping a blemish-free reputation even more difficult. Harnessing the real power of the internet without getting tripped up by poor use of social networking technology has added a number of new risks that corporate boards have to deal with.
In the March issue of Corporate Secretary, I explored the use of social media by governance professionals and revealed that almost every member of a company’s legal department is getting sucked into the social media bubble. Corporate secretaries have been realizing the importance of establishing an identity on the web and as they continue to do so, they are confronted by the daunting question: are you prepared to take responsibility for what other members of your company are saying online?
Risk in the digital space is uncharted territory for many corporate boards, because it is very difficult to project the damage that a single email, text or photo can do once it gets sent to millions of people involved in social networks. ‘Reputational damage can lead to significant collateral harm,’ says Rebecca Grapsas, a senior associate in the corporate department of Weil Gotshal & Manges. ‘And by their nature, it’s difficult to anticipate where reputational risks might arise.’
From Grapsas’ experience, shareholders have used social networking sites to express their thoughts on governance issues, including executive compensation. The potential for a broad audience and the rapidity with which comments can be dispersed, however, results in the potential for a negative statement to quickly put your company’s reputation at stake.
‘Another concern about electronic communications generally and social networking more specifically is that persons tend to let their guard down and may communicate inappropriate information,’ says Grapsas, a guest lecturer on corporate governance at the Yale School of Management who often counsels corporate directors and managers of US public companies. ‘They may get too comfortable with these sites and the ease of accessibility, without appreciating the risks involved. Therefore, it is important to continually remind employees, executives and directors that they need to be careful.’
Since most companies' legal advisers can’t afford to spend hours each day monitoring the slew of networking sites trying to head off disaster, here are some tips Grapsas says should help make managing the online reputational risk conundrums a bit easier:
(i) Assist with managing reputational risks by developing a social media policy applicable to social media communications by employees and directors, both at work and in their private time. Include a section in the code of conduct and related training that specifically deals with social media.
(ii) Work with the board and senior management as well as legal and compliance colleagues to emphasize a ‘culture of compliance’ at the firm, beginning with the ‘tone at the top.’ Continually emphasizing the need for employees to act with integrity should help discourage negative public comments about the company. Also, recognize that so-called ‘rogue’ employees who act out online are often symptomatic of a broader morale problem within the company.
(iii) Work closely with the investor relations and marketing teams to determine a strategic approach to social media. Select which websites/technologies the company will use and for what purposes. Designate employees to manage the company’s own social media accounts and online presence, and provide clear instructions on what their role entails. Consider, for example, what kind of information will be posted and who needs to approve the posts before they go out. Make sure posts are approved by someone who is knowledgeable about disclosure requirements under federal securities laws (such as Regulation Fair Disclosure, proxy solicitation rules, anti-fraud laws and prospectus requirements).
(iv) Work with IR and marketing to designate employees responsible for monitoring the internet for comments about the company, its directors and key executives, and know how posts should be managed from a risk mitigation standpoint. People who are knowledgeable about legal disclosure requirements should be the ones responsible for signing off on comments and providing a solution to any problems that may arise.
(v) Networking sites are constantly evolving so keep the company updated and ensure that your firm or department complies with applicable laws and regulations when using social media and when regulating the use of social media by employees and others.
Remember, failure to act can trigger liability and as a corporate secretary you DO NOT want to be part of the cottage industry of businesses that are constantly forking over thousands of dollars to fix their bad reputation. As the BBC's political correspondent Laura Kuenssberg puts it: ‘One careless tweet could sink the fleet.’
