Social Risk as Strategic Risk

Abstract

A series of spectacular corporate governance and ethical compliance failures as well as the Sarbanes-Oxley Act and other regulatory responses have focused increasing attention on governance and compliance risks. Equally serious are the long-term ""strategic risks,"" such as disruptive innovation or failure to predict shifts in consumer preferences, that companies face. Strategic risks are characterized by complex origins and equally complex, far-reaching impacts. They have the potential to jeopardize both current earnings and growth prospects. As a result, strategic risks require forward-looking risk management approaches that are integrated across the enterprise and linked with strategic planning. Social and environmental issues are emerging as troublesome sources of strategic risk. These issues can present risks directly, by presenting direct operating constraints, or indirectly— for example, by seeding "social risk," or challenges by stakeholders to companies' business practices due to real or perceived impacts on social or environmental issues. As Exhibit ES-1 illustrates, the emergence of social risk is characterized by four components in combination: an issue, a stakeholder or group of stakeholders, a negative perception about the company, and the means to do damage.