It's not unusual for companies to generate more demand for their products than they can handle. But when that company was AT&T, which has struggled to meet bandwidth demand of its ever-expanding iPhone customer base, the company got a lesson in how social media can damage a company's reputation.

Though the irony was probably lost on AT&T's management, angry customers acting as an online "smartmob" used the very connectivity AT&T supplied to organize a national protest against what they believed was the company's poor service. "iPhone Nation," led by blogger and activist Dan Lyons, issued the following call to arms of users in 2009: "On Friday, December 18, at noon Pacific time, we will attempt to overwhelm the AT&T data network and bring it to its knees. The goal is to have every iPhone user (or as many as we can) turn on a date-intensive app and run that app for one solid hour. Send the message to AT&T that we are sick of their substandard network."

Fortunately for AT&T, the FCC stepped in two days before "Operation Chokehold" and warned that it might be considered an illegal threat to national security. The organizers backed off, but thousands of activists had already flocked to Facebook and Twitter to show their support.

The movement was remarkably similar to an online groundswell built against computer maker Dell when journalist Jeff Jarvis coined the phrase "Dell Hell" back in 2005. His popular blog convinced thousands to express their frustration with the company's customer service by voting with their wallets and sending Dell a message to fix its problems -- or face a mass revolt. 

There was one big difference between the scenarios confronting Dell and AT&T, however. Social networks were in their infancy in 2005. MySpace was the leading social network. Facebook was just getting started. Twitter did not even exist. Today, AT&T is operating in a world where the number of social networking users multiplies annually. Facebook now has more than 500 million members and Twitter has nearly 200 million. The net effect is a more connected and viral force unafraid to flex its muscle. Consumerism has been put on steroids thanks to this technological explosion.  

Now, nearly any risk -- a product liability allegation, a poorly handled natural disaster, a financial problem, you name it -- can hurt a company's reputation. And while reputational risks may not feel as tangible to the board as traditional perils, they can be every bit as likely -- and even more damaging.

Companies like IBM, which has lived, operated and in some cases created this new social connectedness, are rapidly moving to an expanded definition of reputational risk that fully comprehends the impact of social media. (See "IBM's Delicate Social Media Balancing Act") They recognize and have documented that this new, connected populace exposes companies to potential challenges that, if left unchecked, can spread rapidly and evaporate shareholder value in a matter of minutes. 

But even as they are moving to protect themselves, they are recognizing the opportunities that the new connectedness provides. Rather than hunkering down in a defensive crouch, they are adopting guidelines that carefully balance the risks and rewards of engagement. The key insight is that closer two-way communication with stakeholders creates the potential for a company to make faster, smarter decisions and create deeper, more meaningful loyalties.

Even Dell, dealing primarily with blogs at the dawn of the social media era, learned these lessons. It responded boldly with a variety of customer service initiatives, including one called "IdeaStorm" that let customers tell the company what they wanted from Dell computers. Slowly and methodically Dell stemmed the tide of negative customer feedback, prompting BusinessWeek to write a story entitled "Dell Learns to Listen."

In many respects, the lessons learned by Dell foreshadowed some of the keys to corporate survival in this new world. Active listening is paramount, and engagement is the new currency for securing customer loyalty. Simply put, customers expect to be heard. They want a greater say in the products and services they consume. And, now, they have it.

Knowing this, companies must be ready to respond.

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Written by William H. Cunningham & Jeff Hunt:

William H. Cunnigham is the James L. Bayless Chair for Free Enterprise at the University of Texas at Austin and the former chancellor of the University of Texas system. 

Jeff Hunt is a principal and co-founder of PulsePoint Group, a management consulting and digital firm that specializes in crisis management and boardroom communications.