Risk Management | ESG
Alexandra Mihailescu Cichon Head of Sales and Marketing, RepRisk
Transparency: The key to risk management
Adverse public and stakeholder sentiment has prompted organisations to incorporate environment, social and governance issues into day-to-day business decisions When the CEO of United Airlines tried to explain the treatment of David Dao, an Asian-American passenger on a flight from Chicago to Louisville, he unfortunately underestimated the power of social media. His remarks that Mr Dao had been ‘disruptive’ and ‘belligerent’ as photos on the web showed the passenger being dragged partially conscious down the aisle of the plane after refusing to voluntarily give up his seat, prompted a social media storm.
In barely 24 hours, there was an online petition demanding the CEO’s resignation, a plethora of tweets calling for Asian passengers to boycott United flights and numerous video clips and memes poking fun at the airline. Even though the airline reached a settlement with the passenger, Fortune Magazine reported that the incident had sparked a four per cent drop in the company’s share price, wiping off about $1.4billion in market capitalisation. One thing is certain: United Airline’s reputation is damaged and the company’s plans to expand into the coveted Asian market have faced a setback. In the past, such incidents would appear on the nightly news, but rarely beyond that. 128 Ethical Boardroom | Summer 2017
Now, with the internet and social media, information travels at lightning speed. And, non-traditional media and stakeholders – from individual customers to non-government organisations (NGOs) and activist groups to bloggers – have new communication platforms and a global audience at their fingertips. This has led us to an unprecedented level of transparency.
Power of big data
While companies may sometimes be the target of criticism, they also now have access to information that can be leveraged to shed light on risks in their business operations – and many do. Information from media and stakeholders external to a company, including NGOs, governments, regulators, and social media, can provide valuable insight and serve as a ‘reality check’ to what the company itself is reporting. For example, a company may have a human rights policy, but what do the sources on the ground report? More than 150 financial institutions and corporates use such data to flag and monitor ESG risks in their business, investments and supply chain – and to reduce blind spots that can turn into reputational, compliance or financial risks. The next challenge is to raise awareness of ESG issues and risks at the boardroom level. Senior management needs to understand that ESG violations can cause not only reputational damage, but also serious financial risk, including loss of access to capital, regulatory fines and even criminal proceedings. The now defunct British Home Stores (BHS) was a pillar of society in the UK, but its public image of respectability
obscured fraudulent behaviour by its former owners, Sir Philip Green and Dominic Chappell, who are being investigated by liquidators to determine whether they breached their duties. In April 2016, BHS went into administration, causing 11,000 job losses and leaving a £571million pension deficit. A parliamentary committee inquiry into its failure concluded that BHS had been systematically misappropriated by its directors. Following a public outcry, Mr Green agreed to pay £363million into the company’s pension scheme. Various international and national institutions, including the UN Global Compact, have already called for the role of the board of directors to be strengthened to ensure that the board is driving a company’s sustainability efforts. In the UK, since October 2015, the Modern Slavery Act has required boards of companies carrying out operations in the UK and that have a turnover of at least £36million to approve and publish an annual slavery and human trafficking statement.
Investor engagement
In early 2017, the OECD released its ‘responsible business conduct for www.ethicalboardroom.com
