The Growing Risks of Social Media

By | July 12, 2010

Asked why he robbed banks, Willie Sutton famously replied: “Because that’s where the money is.”

Something similar can be said to explain why companies are paying more attention to social media these days — because that’s where the consumers are.

Global consumers spent more than six hours per month on social networks in March, more than twice the level a year earlier, according to The Nielsen Co. As more and more people join social networks, companies are increasingly aware that they also need to have a presence on these sites.

Because social networks are used by people around the world and the content posted to these sites can circle the globe in an instant, companies need to think globally when they think about both the rewards and the risks associated with social media.

While social networks are essentially borderless, laws, regulations and sensibilities are local and vary from one country to the next.

To make the best use of social media and minimize the risk of a loss or a lawsuit, companies that expand outside the United States need to understand the legal and regulatory environments of the local markets.

The Growth of Social Media

Globally, social networks and blogs are the most popular online category when ranked by average time spent, according to a December survey by Nielsen. Facebook is the heavy hitter of social media with 206.9 million unique visitors in December 2009, according to Nielsen. Some 67 percent of global social media users visited the site during that month.

The United States has the largest number of social media and blog users, with 142.1 million unique visitors in December, according to Nielsen. But that doesn’t mean that it’s strictly a U.S. phenomenon. After the United States, the largest number of social media and blog users were in Japan, Brazil, the United Kingdom, Germany, France, Spain, Italy, Australia and Switzerland.

Although the United States had the largest number of social media users, Australia led in average time per person spent, with the average Australian spending nearly 7 hours on social media sites in December, according to Nielsen.

With so many people visiting social networking sites such as Facebook and Twitter, it is hardly surprising that ad spending on social networks is also increasing. Nielsen estimates that ad spending on social networks and blogs in the United States more than doubled to $108 million in August 2009.

In addition to spending money on ads on social networks, companies are signing up for accounts and fan pages and putting out content of their own. More than 79 percent of the Fortune Global 100 companies are using at least one of the social media platforms, according to “The Global Social Media Check-Up” released in February by global communications and public relations firm Burson-Marsteller. The report found that 65 percent of the Fortune Global 100 have active Twitter accounts, 54 percent have Facebook fan pages, 50 percent have YouTube video channels and 33 percent have corporate blogs.

Social Media Brings Risk as Well as Opportunity

As companies increase their presence on social media, they increase their interaction with consumers, engaging in conversations that break down traditional barriers to communication. But at the same time, they also open themselves up to new risks as well.

Because social media is about consumers having conversations — with each other and with companies — businesses no longer have total control of the message the way they once did.

In its 128-page report “Network Interference: A Legal Guide to the Commercial Risks and Rewards of the Social Media Phenomenon” released in May, international law firm ReedSmith noted that there are three unofficial “I love Starbucks” pages and more than 500 “I love Starbucks” groups. But, the report noted, for every “I love Starbucks page or group, there is an “I hate Starbucks” group or “Starbucks sucks” page.

In this new environment, the corporate brand and reputation are at risk as consumers give voice to their thoughts and experiences on social media sites. Companies are also at risk of failing to comply with the various laws and regulations that relate to content posted on social media.

Although the European Union has harmonized laws in many areas, these laws have been implemented differently in every country, according to ReedSmith.

These laws and regulations can be grouped into several key categories:

• Advertising and Consumer Protection

• Defamation

• Privacy/Employee Use of Social Media

• Securities Disclosure

Advertising and Consumer Protection

Companies can get into trouble with their advertising and other content on social media in a number of ways — with false or misleading advertising claims, by attempting to improperly influence bloggers to write favorable reviews of their products or by improper use of user-generated content (UGC), which is often used for promotions and contests.

The European Union and the United Kingdom have a number of regulations to guide advertising and consumer protection practices. The European Union, for instance, has several directives that regulate misleading and comparative advertising as well as unfair business to consumer commercial practices, according to ReedSmith. In the UK, the Advertising Standards Authority regulates all forms of advertising, sales promotion and direct marketing, including advertising on social media.

False advertising and word-of-mouth marketing on social media is another concern. In the UK, the Consumer Protection from Unfair Trading Regulations 2008, includes a general prohibition on unfair business to consumer commercial practices. The regulations also legislate against misleading actions/omissions as well aggressive commercial practices.

Another relevant UK regulation is the Business Protection from Misleading Marketing Regulations 2008, which prohibit misleading advertising and set out rules for comparative advertising, according to ReedSmith.


In the United States, the First Amendment provides broad protection for free speech. Other countries, however, are not as vigorous in their defense of free speech.

In England, for instance, the outcome of a defamation case is decided by balancing the right to free speech against the right to reputation, according to ReedSmith.

As a result of the greater protection given to reputation in comparison with other jurisdictions, the UK has become the forum of choice for many defamation claimants, the law firm says.

Privacy/Employee Use of Social Media

Social media also opens up new opportunities for privacy violations and for inappropriate disclosure of confidential information, such as trade secrets, intellectual property or confidential employee information. Inappropriate posts on social networks also could lead to claims of a hostile workplace environment.

According to a June 2009 survey by Proofpoint, an e-mail security and data loss prevention company, 18 percent of the 220 companies surveyed said they had investigated a data loss event via a blog or message board in the last 12 months.

Seventeen percent said they had disciplined an employee for violating blog or message board policies, while 9 percent reported terminating an employee for such an event.

Companies also experienced problems with data loss on social networks — 17 percent versus 12 percent in the prior year. Eight percent reported terminating an employee for such a violation compared with only 4 percent in 2008.

Short message services such as Twitter also presented a problem for companies, with 13 percent investigating an exposure event.

Securities Disclosure

Businesses are allowed to disseminate market-sensitive information to investors and the public by electronic means under English law, according to ReedSmith.

The problem comes in connection with what is said. Unauthorized disclosure of market sensitive or insider information or attempts to manipulate markets would put companies at risk with securities regulators.

Risk Management

To manage these risks, companies must establish and expand social media policies to help guide corporate activity and thinking in this area. But in spite of the rapid increase in their use of social media, very few companies have a social media policy in place.

Although 74 percent of respondents in an Ethics and Workplace survey by Deloitte in May 2009 said they believe social networks make it easier to damage a company’s reputation, only 17 percent of executives said they had programs in place to monitor and mitigate the possible reputational risks related to the use of social networks.

Less than a quarter said they have formal policies on the use of social media.

While companies appear to be lagging when it comes to developing social media policies, there is no turning back the social media tide. As younger generations enter into the workforce in coming years, they will be even more plugged in than the employees of today.

Businesses also need to be prepared to act quickly in the event of a public relations crisis, where time is of the essence. In today’s wired environment, information travels quickly and companies no longer have the time to go through a rigid and lengthy internal review process before issuing a response or a retraction.

To minimize the risk of a loss or damage to the company’s reputation, companies can take a number of steps:

1. Develop a comprehensive “new media” policy. The policy should establish the ground rules for all employees — not just those in marketing — on communicating online, including social networking.

2. Establish a social media point person. There should be at least one person, if not a team, in charge of overseeing the company’s social media activities and responding in the event of a crisis.

3. Review every country’s laws and regulations related to social media. Even within the European Union, laws can be implemented differently. Don’t take legal or regulatory compliance for granted.

4. Review insurance coverages to see whether they provide coverage for risks arising from social media. General liability policies have very restrictive coverage regarding advertising injuries. Even so, there may be coverage under a number of policies, including directors and officers, errors and omissions, property, fidelity bond, fiduciary liability, as well as general liability. Cyber liability policies also may respond in certain cases.

Agents and brokers also need to gain a better understanding of social media risks and ensure that clients have developed a comprehensive policy to manage these risks.

When choosing an insurer, companies should look for a carrier that has extensive international experience, a strong branch network and a reputation for reliable, quality loss control and claims services. The insurers also should be familiar with the rules and regulations that pertain to the countries where the multinational has operations and have expertise in the area of social media.

Every day, more and more people are joining social networking sites, reading blogs and following Tweets. Companies need to have a presence on social media to reach consumers where they are and to respond to their concerns as well.

By developing policies in advance and researching local laws and regulations, companies can minimize the risk while taking advantage of the opportunities presented by social media.

Ellis is a senior vice president of Chubb & Son and Worldwide Manager, Chubb Multinational Solutions. William E Barr, senior loss control specialist at Chubb Group of Insurance Cos. also contributed to this story.

Topics USA Legislation Europe Australia

About Kathleen Ellis

Ellis is a senior vice president of Chubb & Son and manager of Multinational Risk Group - Global Accounts. More from Kathleen Ellis

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