Ferma 2013: Social media creates flaws in ‘rear-view’ approach to risk management

The speed at which political instability spreads is now inextricably linked to social media, as disaffected populations globally are increasingly turning to this powerful outlet to drive political demonstrations.

That was the conclusion of Marsh’s report Social Media Adds to Political Risk Equation in Emerging Markets.

Published at the Ferma Forum, the report suggests that as a result of the speed of social media, the ‘rear-view mirror’ approach to risk management (frequently used by multinationals to forecast risk by examining past events) is no longer sufficient when operating in at-risk countries.

Marsh global credit and political risk practice leader Evan Freely says: “Social media can exacerbate political risk by accelerating the formation of political protests and enabling civil unrest to an easier and quicker transition from a single-country phenomenon to a regional event.

“Conversely, authoritarian governments may use social media to deflect popular discontent away from political leadership and toward foreign entities.”

He adds: “This unrest can translate into a variety of political risks for business, including expropriatory actions, forced abandonment, forced divestiture, property damage, contract frustration, business interruption and trade disruption.”

In response to the changing landscape of political risks, Marsh advocates a multi-country and multi-hazard approach to managing political risk. This includes the purchase of broad, multi-country political risk insurance policies and detailed planning to ensure business continuity and the safety of employees and key assets.

The report suggests that organisations doing business in countries with high levels of political risk should:

• Review their business interruption and supply chain resiliency plans, evaluate the impact of potential political risk events on their own operations and on those of their customers and suppliers.
• Ensure they can communicate potential problems to employees, customers, suppliers and review crisis communication plans to ensure safety of employees.
• Review their credit risks and credit control policies and procedures while financial monitoring can identify strengths and weaknesses in their credit risk management processes, enabling firms to avoid bad debts and improve cash flow.

Freely adds: “The proliferation of social media will likely accelerate in the years to come, at times facilitating protest movements, including in some countries traditionally deemed ‘safe’.”

He added: “It is vital that business recognise the added risks that social media can present and manage those risks accordingly.”