Is Social Media a Source of Business Risk?

A new study claims that cyber threats and online social media will become increasingly significant sources of business risk in 2012. Control Risks, a leading business risk consultancies, launched Monday RiskMap 2012, its annual review and forecast of business risk for the year ahead, including regional outlooks, and a rating of political and security risk in 173 countries.

International business faces intensifying volatility in 2012, driven from above by political instability and economic uncertainty, and from below by social protest and increasing scrutiny of corporate practices.

The study says many governments appear ill-equipped to manage severe economic challenges in 2012. Global growth prospects remain hostage to debt and political crises in the European Union and the US, and fast-growing emerging markets are not immune to potential recession.

High, volatile food and fuel prices, meanwhile, will continue to aggravate social and economic tensions – especially in developing countries.

The global wave of social protest that erupted in 2011 is unlikely to subside, and may intensify. Global economic travails will continue to exacerbate the disparities in wealth, opportunity and political influence that provoked social protest worldwide in 2011.

In particular, the study says, rising income inequality – in both developed countries such as the US and emerging markets like China – has emerged as a point of significant social tension.

Social media – instrumental in demonstrations from the Arab spring to Occupy Wall Street – will continue to grow and mature as a platform for social and political action, including for targeting companies.

Richard Fenning, CEO of Control Risks, said: “The criticism of both states and markets by people across the world is posing the first major challenge to globalization in the 21st century.”

The combination of economic uncertainty and social protest presents companies with a range of potential security, political and operational risks. These include:

• The growing significance of cyber and information security threats, arising from both criminal and ‘hacktivist’ groups, as well as the security and integrity challenges presented by pervasive online social media, which include data theft, fraud and reputational damage
• Rising prospects of government intervention in business through changes in regulation, tax policy or contracts, driven by mounting public hostility towards companies and investors as well as fiscal pressures
• Increased labor unrest stemming from trade unions battling wage and benefit cuts, as well as low-income workers – especially in emerging markets – pressing for better conditions, labor rights and personal dignity

In response to these issues, companies should focus on:

• Greater monitoring of the evolving public sphere, including through social media to provide a real-time barometer of public sentiment, as well as potential early warning of political, reputational or security threats
• Being more accountable to local communities and governments, as well as shareholders, customers and employees, through listening closely to their needs and concerns
• Recognizing that there are no easy solutions to systemic problems. The problems of global capitalism are more complex than merely higher wages or more benefits.  They are also about personal dignity, fairness and legitimacy.  These issues demand steady, long-term engagement, rather than a short-termist approach

In this highly challenging environment, Control Risks has identified five key states for investors to watch in 2012:

Colombia: Although security concerns persist, leftist guerrillas are on the back foot and security gains continue to open up new areas for extractive development. In 2011 the country won back its investment grade rating, while a long-delayed free trade agreement with the US will come into force in 2012, and President Santos continues to enjoy an overwhelming legislative majority.

Sri Lanka: Despite international criticism of the civil war against the LTTE, the Sri Lankan government’s tight control of the security situation has made the island much safer. With recent offshore gas finds there will be renewed interest from foreign companies in licenses of oil and gas concessions in the Mannar Basin, expected in early 2012. Long term opportunities in delivering hydro power exist though the possibilities of other nations’ firms contributing in the thermal power sector is limited by India and China’s presence on the island.

Mozambique: Mozambique’s stable political environment has encouraged a boom in offshore petroleum exploration where investors have been rewarded by significant discoveries of natural gas reserves. The development of a transport corridor to South Africa has also facilitated the development of the country’s nascent mining sector and existing infrastructure shortfalls – a legacy of years of civil conflict – present ample opportunities for investors.

Libya: Over the coming years Libya will be able to finance wide-ranging reconstruction through sovereign wealth and oil revenues, providing substantial commercial opportunities across a range of sectors. While conducting business will undoubtedly remain complex with a legacy of corruption and inefficient bureaucracy complicated by emerging political risks, there is nonetheless significant potential for investors.

Bulgaria: Against the backdrop of financial uncertainty in more profligate EU member states, Bulgaria, with an expected 2011 budget deficit at 2.5% of GDP and public debt at 17.5%, clearly stands out. Although companies will need to take adequate measures to protect against risks stemming from pervasive corruption and organized crime, the country’s relative fiscal and political stability, coupled with strong links to the EU, Russia, and Turkey, make it an attractive, albeit understated, investment destination in 2012.

Control Risks is a global risk consultancy specializing in political, security and integrity risk.