Whistle While You Work

If you look at the history of financial regulation in the United States, one of the things you notice is that almost all regulation of financial activity at the federal level comes as a result of some form of financial scandal or abuse. This goes all the way back to the Securities Act of 1933, which resulted from the stock market shenanigans brought to light by the Pecora hearings following the stock market crash of 1929. In more modern times, this trend has continued with the enactment of the Sarbanes-Oxley Act of 2002 in the wake of Enron, Tyco, and others, and the Dodd Frank Financial Reform Act of 2010 that was spawned by the housing and mortgage crisis.

These laws are usually enacted quickly, as legislators are anxious to demonstrate that they are doing something, but the resulting legislation lingers on for many years. Companies are left to deal with and adjust to murky legislative language and often burdensome regulations resulting from laws that are designed to prevent the last crisis. Often these laws have unintended consequences, such as the effect of Sarbanes-Oxley on the number of companies choosing to file their IPOs in the United States.

Now we have at least one provision tucked away in the Dodd-Frank law which may come back and bite public companies. I am referring here to the whistleblower provision in the financial reform act. Under this provision of the new law, if a whistleblower provides independent information of fraud to the SEC that results in a successful enforcement action that recovers at least $1 million in sanctions, the whistleblower is entitled to recover at least 10% and up to 30% of the recovered funds.

There are a couple of interesting twists to this legislation. The first is that the independent information regarding the fraud can come from independent analysis of public information. Thus, an outside analyst without any inside knowledge of the company’s books and records can blow the whistle on a company if their analysis shows that the company must be acting fraudulently. This was precisely what happened in the Madoff scandal, when Harry Markopolos went to the SEC with an analysis that showed the returns shown by Madoff were impossible to achieve. It doesn’t take a great leap of imagination to foresee a new subgroup of analysts devoted to looking for financial fraud with the thought of collecting a reward from the SEC.

It also doesn’t take a great deal of imagination to think that the plaintiff’s bar would be very interested in the new whistle blower rules. Now, instead of trolling through Form 4 filings to look for Section 16(b) short swing profits violations by insiders, aggressive attorneys can cultivate relationships with short sellers in the hopes of joining together to find companies engaged in fraudulent activities. Given that short sellers are almost always convinced that companies are defrauding the public and plaintiff’s lawyers never pass up an opportunity to turn a new legal provision into a revenue stream, this is a match made in heaven.

If nothing else, people involved in the disclosure of company information pursuant to the securities laws needs to take a close look at the whistleblower provisions of the Dodd Frank law. Under the current SEC proposed regulations, whistleblowers do not even have to first go through company channels before blowing the whistle. So the company needs to get their disclosures right on the first try, because if they don’t, there may not be a chance to remedy things before the SEC is notified. And the possibility of $100,000 or more in reward money can make it very tempting for whistleblowers to accuse first and verify later.

Social Media and Investor Relations Redux

Readers of this blog will know that I am somewhat of a skeptic when it comes to the use of social media in investor relations (and yes, I recognize the irony of that statement when written in a blog). It’s not that I think there is no use for twitter, linkedin and the other social media services, it just that they strike me as being over-hyped compared to the nitty gritty job of getting the basic message right. But I am here to report that even I can be convinced of the ways that social media can be helpful.

Earlier this week I was privileged to give a speech to the NIRI Houston chapter on my favorite topic, the intersection of academic disciplines and real world investor relations. Before the speech I was introduced to Catherine Crofton of Q4 Web Systems. It turns out that Q4 Web systems had agreed to sponsor the luncheon and Catherine was going to introduce me. As we chatted about investor relations issues before lunch, Catherine told me about a success story of one of their clients in using social media. It turns out their client, TVI Pacific Inc., launched a campaign to use social media in their investor relations program that, coupled with a good story, helped to raise the firm’s visibility with investors, resulting in improved trading volumes and stock price performance. Q4 Web Systems has written about the program on their blog, which can be found at

http://www.q4blog.com/2010/01/11/tvi-pacific-shares-roi-of-using-social-media-for-ir/.

As I thought through this example, it occurred to me that the company in question, TVI Pacific, was a micro cap company, and one of the big issues facing small cap companies is simply one of visibility. If you are a Fortune 500 company, visibility is not an issue; many sell side analysts cover you, you have a large established base of institutional shareholders and the media is focused on you. However, if you are a small cap company, just getting on the radar screen of many investors presents a problem: the sell side may not cover you at all, very few institutions may own you and you are thinly traded. In short, the markets are a whole lot less efficient when it comes to small caps, mostly it seems because the information does not get in front of the right investors.

There is actually some interesting academic research on this topic. The title of the paper is “Investor Relations, Firm Visibility and Investor Following” and was written by Brian Bushee of Wharton and Gregory Miller of the Harvard Business School. The paper finds that investor relations efforts to improve a small cap firm’s visibility result in better trading volumes and increases in institutional ownership and better valuations.

The interesting thing about the TVI Pacific case is that they used social media in the form of postings on Twitter, Facebook, Fliker, YouTube and Slideshare and links on their website. Slideshare is a new one on me, but it turns out there is a site that allows you to post and share your slide presentations. (For those of us who have had to sit through endless boring powerpoint presentations during meetings, this may seem a bit masochistic, but it seems to be a popular site. Who’d of thunk?)

So if you are a small cap stock in need of visibility, social media may be an additional set of tools an IR officer can use at very low cost, assuming you can get the company’s general counsel to sign off on the use of them.

And it also seems as though a certain cranky IR observer may have to wind up eating his words.

Yowzer! Step Right Up and Hear the Professor!

I’m happy to report that I will be speaking on February 15^th at the Houston NIRI chapter on the topic of “IR Insights from Academia: Does Any of That Fancy Theory Apply in a Real World Context?” This will be the second time I’ve given this talk, having successfully addressed the Dallas NIRI chapter last November (at least they said it was successful). For those interested in attending, details can be found on the NIRI Houston web site, http://www.niri-houston.org/Luncheon--1.html?ModKey=mk$clsc&LayoutID=7&EventID=95

I find the topic fascinating because it gives me a chance to talk about the intersection of theory and practice. Since leaving the corporate practice of IR and developing my investor relations class at Rice University, I’ve had the opportunity to step back from the day-to-day pressures of IR and really think about what it is IR practitioners do and how all of that fits into things that are taught in business school.

When you think about the discipline of investor relations, it incorporates aspects of marketing, communications, finance, law and the capital markets. Further, the audiences it affects go far beyond just investors to encompass employees, customers, suppliers, creditors, bond holders and governmental entities to name a few. When you throw into the mix that there are some schools of academic theory that hold that active investing and investor relations activities add no value, there’s quite a bit that can be discussed.

Just by way of a teaser for some of the topics I cover in the talk, here’s some of the theory versus real world that I cover:

Finance – most valuation models are constructed using discounted cash flow techniques and how they work has a significant impact on your company’s stock price. Beyond the modeling technique however, there lies a significant takeaway to think about.

Marketing – a lot of investor relations literature talks about targeting investors, but that is only one-third of the three crucial steps to marketing.

Communications – there is a lot of really bad IR communications out there, much of it in the form of PowerPoint slides. I look at examples from some of the biggest corporations in the U. S. (This section is the most fun.)

Law – lawyers are taught to think in a particular way, and regulatory lawyers have a unique take on that. As someone who practiced law for ten years, I attempt to bridge the communications gap between lawyers and IR practitioners.

If you are in the Houston area, I hope you can join me. If you are not in the Houston area, but are interested in having me come to a local NIRI chapter, please give me a call. I’m somewhat of an evangelist on bringing more academic rigor to investor relations, so there is no charge for the talk other than travel expenses.