Monitoring Risks Before They Go Viral: Is it Time for the Board to Embrace Social Media? Authors: Professor David F. Larcker, Sarah M. Larcker and Brian Tayan, Researcher, Corporate Governance Research Program, Stanford Graduate School of Business. Published: April 5, 2012 According to Nielsen, social networks and blogs account for the largest percentage of time that individuals spend online, more than email and reading the news. Given the pervasiveness of social media and the potential impact it can have on corporate activities, some experts recommend that boards of directors pay closer attention to the information exchanged on these sites. Information gleaned through social media might provide unique and relevant insights that improve decision making. For example, this information might be used to supplement the traditional key performance indicators that boards use to monitor corporate performance. Similarly, it might also be used as an “early warning” system to improve risk management. In this closer look, we examine these issues in detail. We ask: Why haven’t more boards utilized information from social media to improve corporate oversight? Should the board formally review social media metrics, or does this represent an encroachment on management? Can this information be used to safeguard corporate reputation? Read the attached Closer Look and let us know what you think!

1. Topics, Issues, and Controversies in Corporate Governance and Leadership
S T A N F O R D C L O S E R L O O K S E R I E S
stanford closer look series 1
Monitoring Risks before They Go Viral:
Is It Time for the Board to Embrace
Social Media?
Introduction
According to Nielsen, social networks and blogs
account for 23 percent of the time that individu-
als spend online, more than email and reading the
news.1
While the vast majority of consumers (89
percent) use search engines to research products
and services that they are interested in purchasing,
it is perhaps surprising that 42 percent follow or
“like” a brand on a social networking website.2
Given the pervasiveness of social media and the
potential impact it can have on corporate activities,
some experts recommend that boards of directors
pay closer attention to the information exchanged
on these sites. For example, consultant Fay Feeney
argues that “boards need to adapt to a connected
world where listening, disclosure, transparency and
engaging is expected.”3
She advocates that boards
embrace social media as a means of connecting with
and engaging in dialogue with corporate stakehold-
ers. Similarly, as consultant Lucy Marcus explains:
“The reality is that social media exists. It’s not
separate from everything we do.” She argues that
if boards are not engaged in social media, then dis-
cussions will take place “that they are not a part of
and they are not engaged in.”4
This can lead to the
dissemination of factually erroneous information
or rumors that a company will have difficulty cor-
recting.
There are several reasons why the board might
find the information provided through social media
to be valuable. First, directors are responsible for
oversight of the corporation. This includes moni-
toring and advising the senior executive team as it
develops and implements the corporate strategy. In-
formation gleaned through social media might pro-
vide unique and relevant insights into the success
By David F. Larcker, Sarah M. Larcker and Brian Tayan
April 5, 2012
of these efforts and supplement the traditional key
performance indicators (KPIs) that directors use to
evaluate management and award bonuses.5
Procter
& Gamble has taken such an approach. The com-
pany has developed a dashboard that uses Bayes-
ian analysis to scan blogs, tweets, and other social
media to summarize consumer sentiment about
its products and measure brand strength. Chair-
man and CEO Robert McDonald personally re-
views all information that relates to the corporate
brand.6
There are several “off-the-shelf” products
that companies can purchase to collect similar data,
although a company might want to customize these
products to meet its specific needs (see Exhibit 1).7
Second, information gathered through social
media might alert the board to risks facing the or-
ganization in a way that is not currently available.
These risks might include:
• Operational risk: how exposed the company is to
disruptions in its operations.
• Reputational risk: how protected are the com-
pany’s brands and corporate reputation.
• Compliance risk: how effectively the company
complies with laws and regulations.
There is some evidence that social media pro-
vides effective early warning in these areas. For ex-
ample, in online message boards anonymous Eli
Lilly sales representatives discussed the practice of
selling Zyprexa (an antipsychotic medicine) off-
label for the treatment of dementia months before
the news broke in the mainstream media. Similarly,
Nestlé first came under criticism in online commu-
nities for sourcing palm oil (a main ingredient in
many of its products, including Kit Kat and Nestlé
Crunch candy bars) from an Indonesian supplier

2. stanford closer look series 2
Monitoring Risks before They Go Viral: Is It Time for the Board to Embrace Social Media?
accused of destroying rainforests. The company was
eventually forced to issue a public apology and re-
structure its supply chain to source from sustain-
able providers. Had the boards of these companies
been monitoring the discussion online, both might
have been alerted earlier to these risks and moved
proactively to address them. In this way, informa-
tion gathered through social media can supplement
the data provided by management regarding key
risk factors facing an organization (see Exhibit 2).
Survey evidence suggests that many manage-
ment teams would welcome the participation of the
board in a discussion about social media. According
to a Deloitte study, 58 percent of executives believe
that reputational risk associated with social media
should be a board room issue. Only 17 percent of
companies currently have a program in place to
capture this data.8
Still, there are reasons why the board of directors
might not want to have access to this information.
First, the responsibilities of the board of directors
are separate from those of management. Directors
are expected to advise on corporate strategy, the
business model, and risk management, but they are
not expected to handle these activities themselves.
Reviewing detailed information from social media
aggregation providers might encroach too closely
on activities under management’s purview. Second,
in performing its monitoring obligations, the law
explicitly provides that the board may rely on infor-
mation furnished by management. Unless there are
obvious “red flags” regarding the trustworthiness of
management, the board of directors is not expected
to develop alternative means of informing its deci-
sions. To this end, the board of directors might not
want to review information from social media un-
less it is provided by management. Third, the infor-
mation captured through social media might not be
accurate. Directors might feel compelled to act on
negative information, even if it is not representative
of the general sentiment of stakeholders, because
failure to respond would expose them to legal li-
ability. Finally, directors might be encouraged to
engage directly with stakeholders. There are several
examples of CEOs engaging in social media only
to have their actions backfire.9
Directors might be
wary of repeating these mistakes.
Why This Matters
1. Social media introduces a new level of detail and
complexity to information gathering regarding
a company and its stakeholders. Why haven’t
more boards of directors made certain that man-
agement has a process in place for collecting,
analyzing, and responding to this information?
Do boards actually know what questions to ask?
Can boards distinguish between a good system
for monitoring social media and a bad one?
2. The examples above suggest that social media
can provide early warning of risks facing an orga-
nization. Should the board formally review this
information, or does this represent an encroach-
ment on managerial prerogative? Which social
media metrics should be presented to the board
and which excluded? Where do the responsibili-
ties of the board end and those of management
begin?
3. One important task of the board is to monitor
organizational reputation. How is this currently
done? Should overall sentiment derived from
social media sources be a primary input in this
analysis? 
1
Nielsen, State of the Media: The Social Media Report. Q3 2011.
2
Sample consists of internet users and therefore might not be rep-
resentative of general population. Source: Fleishman Hillard, 2012
Digital Influence Index Annual Global Study.
3
Fay Feeney, “Leading a Board at the ‘Speed of Instant,’” The Corpo-
rate Board, March/April 2011.
4
Interview with Lucy P. Marcus, “Why Boards Need to Adopt Social
Media,” Reuters, March 22, 2012.
5
This is particularly useful for nonfinancial performance measures—
such as employee satisfaction, customer satisfaction, supplier reputa-
tion, product/service failure, and product innovation—that are dif-
ficult to measure.
6
Robert McDonald, “Inside P&G’s Digital Revolution,” McKinsey
Quarterly, November 2011.
7
Examples include Sysomos, Converseon, ListenLogic, Scout Labs,
NM Incite, Cymfony, Synthesio, Radian6, and Visible Technolo-
gies. In general, these companies or products provide metrics around
company favorability, influencers, topics and themes about a com-
pany and its competitors, positive/negative sentiment, text analytics,
geography, and demographics.
8
Deloitte, 2009 Ethics and Workplace Survey.
9
For example, in 2007, John Mackey, CEO of Whole Foods, came
under fire for regularly making anonymous posts on Yahoo! Finance
message boards. While an SEC investigation cleared Mackey of
wrongdoing because he did not profit from his actions, the board
of directors modified the company’s code of conduct to bar senior
management and directors from making posts about the company,
its competitors or vendors on unsponsored websites. See Andrew
Martin, “Whole Foods Executive Used Alias,” The New York Times,
July 12, 2007; and David Kesmodel and Jonathan Eig, “Unraveling

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Monitoring Risks before They Go Viral: Is It Time for the Board to Embrace Social Media?
Rahodeb: A Grocer’s Brash Style Takes Unhealthy Turn,” The Wall
Street Journal, July 20, 2007; and David Kesmodel, “Whole Foods
Bars Executives from Web Forums,” The Wall Street Journal, Novem-
ber 7, 2007.
David Larcker is the Morgan Stanley Director of the Center
for Leadership Development and Research at the Stanford
Graduate School of Business and senior faculty member
at the Rock Center for Corporate Governance at Stanford
University. Sarah Larcker is Director of Account Planning
at Digitas Health. Brian Tayan is a researcher with Stan-
ford’s Center for Leadership Development and Research.
David Larcker and Brian Tayan are coauthors of the books
A Real Look at Real World Corporate Governance and
Corporate Governance Matters. The authors would like
to thank Michelle E. Gutman for research assistance in the
preparation of these materials.
The Stanford Closer Look Series is a collection of short
case studies that explore topics, issues, and controversies
in corporate governance and leadership. The Closer Look
Series is published by the Center for Leadership Devel-
opment and Research at the Stanford Graduate School
of Business and the Rock Center for Corporate Gover-
nance at Stanford University. For more information, visit:
http://www.gsb.stanford.edu/cldr.
Copyright © 2012 by the Board of Trustees of the Leland
Stanford Junior University. All rights reserved.

4. stanford closer look series 4
Monitoring Risks before They Go Viral: Is It Time for the Board to Embrace Social Media?
Exhibit 1 — Example of a Social Media Dashboard
Source: The authors.
0
50
100
150
200
250
0
200
400
600
800
1000
1200
1/1/12 1/8/12 1/15/12 1/22/12 1/29/12 2/5/12 2/12/12 2/19/12 2/26/12 3/4/12 3/11/12 3/18/12 3/25/12
Daily Volume
Category Mentions Brand A Mentions Competitor Mentions
305
152 188
341
475
915
530
Need Features Availability Price Packaging Quality Effectiveness
% Posts 15.6% 34.4% 50.0%
Stage Pre-purchase Point of Sale Post-purchase
Life Cycle Data
Lifestyle
Impact,
32.5%
Out of
Pocket
Costs,
17.6%
Effective
ness,
28.1%
Side
Effects,
4.6%
Switch-
ing,
17.2%
Online Discussion Themes Description of Themes
LifestyleImpact
Opinion posts regarding impact
on quality of life or ability to
perform tasks
Out of Pocket Costs
Direct mention of costs
associated with product
Effectiveness
Opinions about effectiveness of
product
Side Effects
Posts about the unintended
consequences of product use
Switching
Mentions of past or present
switching between brands or
the desire to switch
30.7%
2.3%
6.4%
18.9%
0.8% 1.0%
39.9%
White Black Asian Latino Indian Other Unknown
Demographics:Share of Voice
Negative Positive
Overall Sentiment
Data provider can “listen” for company or product name.
Changes in discussion volume and sentiment can be moni-
tored around key events, both those planned by the com-
pany (such as product launch or marketing event) and
those that are unexpected (such as news story or crisis).
Online discussion is bucketed around topic groups through
linguistic modeling, looking at verbal cues to estimate
who the speaker is. Data provider will mine discussion for
main topic categories.
Discussions can also be bucketed
around themes. It is equally impor-
tant for a company to have the capa-
bility to drill down into the data and
get an explanation for “why” certain
themes are emerging. The company
can intervene upon the emergence
of negative themes.
Sentiment meters can be devised for
each stakeholder group: customers,
suppliers, employees, investors, etc –
based on forum in which discussions
take place or comment themes. Sen-
timent can also be tracked over time.
Demographic data is estimated
based on verbal cues and refer-
ences, although sometimes demo-
graphic data can be supplied, such as
through Facebook.

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Monitoring Risks before They Go Viral: Is It Time for the Board to Embrace Social Media?
Exhibit 2 — Potential for Social Media to Supplement Board Information
Source: The authors.
Disclosed Risk Factors
(Form 10-K)
• Industry
• Competition
• Customers
• Suppliers
• Compliance
• Etc.
Social Media
Dashboard
Management
Provided Information
• Strategy reports
• Performance metrics
• Internal audit
• Internal controls
• Legal reviews
• Etc.Gap
Board = Ask Questions