Social Media, the SEC and Corporate Disclosure – a Wobbly Three Legged Stool

I’m always surprised by it, but it turns out that some people actually read what I write. In my last post I wrote about the practical implications of the SEC’s recent Netflix social media investigation. In a nutshell, here’s what I said:

“…the release basically establishes a safe harbor for the use of social media which investor relations departments should waste no time in establishing as a prudent risk management tool. The SEC has said that companies should take steps to alert the market about which forms of communications a company intends to use for dissemination of material, non-public information. Therefore, adding language to a company’s web site and press releases to the effect that the company may from time to time use social media sites to disclose important information would seem to be the prudent thing to do.”

Shortly thereafter I received an email from Broc Romanek at TheCorporateCounsel.net (www.thecorporatecounsel.net) explaining his take on the issues at hand. I have a great deal of respect for Broc and will readily admit that he knows more about the ins and outs of how the Securities and Exchange Commission works and thinks about issues than I do. On the other hand, I’ve spent the bulk of my career inside public corporations and have a pretty good feel for that particular viewpoint.  I’ve reproduced (with Broc’s permission) the email exchange below because I think it is a good illustration of the two points of view on this subject.

John – on your blog about the SEC’s guidance, the CYA approach actually is problematic. As borne out on my webcast on this topic last week, I hear that the SEC Staff is not happy with those companies announcing a bevy of SM channels for which they have no real intention of using them as investor communication venues. And investors probably don’t want to be forced to track a bevy of channels for which the company doesn’t intend to provide useful info for them. It’s a loser on both fronts.

thx, broc

Broc:

I recognize that it's problematic, but it is a problem the SEC created. If I was a general counsel, and I had the opportunity to create one more layer of insulation from Reg FD claims, I would grab it. Fear of Reg FD retroactive enforcement is a giant bugaboo for many companies, so doing everything you can to lower the chance that the SEC will open an investigation makes sense.

From an investor's standpoint it is a real headache to follow multiple feeds, but most investor relations departments will take the view that it is not their job to make the analysts' job easier.

I think the CYA approach only works if the social media site is widely followed and qualifies as a recognized channel of distribution, but as more companies use social media, and CEOs become more comfortable with blogging & posting, there has got to be a way to facilitate open communication without constant fear that you will wander into the Reg FD quagmire.

John

John: I believe there is way too much paranoia about Reg FD compliance. Just because a statement may be Reg FD compliant – because a CYA channel was created – it isn’t insulated from a 10b-5 claim that the statement was misleading or omitted something, which will be the more likely result – and much more serious result – when something “material” is posted on a SM channel, particularly Twitter since it is limited to just 140 characters.

Broc

I’m not sure what all the implications of this social media stuff are, but this is probably a good illustration of the law of unintended consequences relating to governmental regulation. The SEC says its OK to use social media to disclose material non-public information if it qualifies as a “recognized channel of distribution” for communicating with their investors, but then is not happy when companies announce they intend to use them. Companies on the other hand, see this as a way to add a layer of protection so they don’t wind up in the SEC’s crosshairs when their CEO either gets carried away when writing a blog or Facebook post or writes something that they genuinely believe is not material as Reed Hastings of Netflix did.

The point of all of this should be to enhance and facilitate the flow of information to investors and allowing social media to serve as a recognized channel of distribution will help accomplish this. 

The Practical Implication of the SEC’s Netflix Social Media Investigation

Investor relations Musings has been on hiatus over the past five months as various items from my personal life – selling a house, moving back to the Chicago area, buying a new house, finishing my teaching at the Jones Graduate School of Business at Rice University – have conspired to keep me from doing much writing. However, now I’m back to add my two cents to whatever investor relations topics catch my fancy.

In the period during which I’ve been silent, perhaps the most interesting investor relations development has been the SEC’s report of investigation regarding Netflix. You may recall that Reed Hastings, the CEO of Netflix, used of his personal Facebook page to disclose that Netflix had exceeded 1 billion hours of viewing during a single month and the SEC investigated whether this constituted a violation of Regulation Fair Disclosure. The case presented a number of interesting issues. First, there was the  threshold question of whether an internal company metric such as viewing hours should be considered material, when company revenue was based on fixed subscriber fees, not viewing hours. Second, the case presented a great example of how a company, by talking about an internal company metric such as viewing hours in both public documents such as press releases and shareholder letters, and in less public documents such as blogs and Facebook pages, builds a case for the SEC that the information is in fact material. (This is a great example of how trying to be transparent can get you into trouble with regulators, but that is a topic for another day.) 

However, the SEC sidestepped these issues by giving Reed Hastings and Netflix a pass on any regulatory sanctions and using the investigation to issue guidelines on the dissemination of material non-public information through social media sites. In a nutshell, the SEC said you can do it, as long as you tell investors where to look and your social media sites qualify as a “recognized channel of distribution” for communicating with their investors. 

From my point of view, the release basically establishes a safe harbor for the use of social media which investor relations departments should waste no time in establishing as a prudent risk management tool. The SEC has said that companies should take steps to alert the market about which forms of communications a company intends to use for dissemination of material, non-public information. Therefore, adding language to a company’s web site and press releases to the effect that the company may from time to time use social media sites to disclose important information would seem to be the prudent thing to do. For example, here’s what General Electric said in its first quarter 2013 earnings release: 

“GE’s Investor Relations website at www.ge.com/investor and our corporate blog at www.gereports.com, as well as GE’s Facebook page and Twitter accounts, contain a significant amount of information about GE, including financial and other information for investors. GE encourages investors to visit these websites from time to time, as information is updated and new information is posted.”

For most companies the point of this statement would not be to establish social media as their principal points of disclosure, but rather to insulate them in the event some important piece of information slips out in a twitter, Facebook or blog post. Remember, what is considered material, non-public information is determined with the benefit of 20/20 hindsight.

One Tweet Over the Line - Social Media, Investor Relations and Common Sense

Occasionally a sacrifice must be made to the gods of new technology. That is why innovation is sometimes referred to as “the bleeding edge”.  The latest cautionary tale about the brave new world of social media just happens to be about Gene Morphis, the now former CFO of Francesca’s Holdings, a public company, who used Facebook and Twitter to make comments about company and board activities and got fired for his comments.

We have been living with social media for a number of years now, so perhaps it’s not exactly leading edge, but in areas touching upon investor relations, companies have been late adopters, so there is not a lot of precedence to guide people. However, there are two touchstones people should use when putting out blogs, tweets and other social media postings.

First, consider what the Securities and Exchange Commission has said on the subject. To put it plainly, the SEC has stated that that statements made by a company, or anyone who could be considered as speaking for the company, must comply with all of the requirements and restrictions of the securities laws. That means that you must be truthful, complete and not misleading in any statements you make. You also have to comply with the requirements of Reg. FD, and if your blog or twitter feed doesn’t qualify as a broad based distribution method (and most probably do not) then you cannot use it to release material non-public information.

The second item to take into consideration in making social media comments about your company is plain old common sense. One way to test what you want to put in a blog or twitter post is to ask yourself, “Is this something I would be comfortable saying to a room full of equity analysts?” If not, then don’t put it out on the Internet where everyone can see it. This is not rocket science, but there seems to be a switch that gets flipped when some people get on the computer and start typing. People seem to think they can say anything and not be held to the consequences. Who can forget John Mackey, the CEO of Whole Foods making derogatory postings on a discussion board about a company Whole Foods later acquired? (As an aside, Mackey appears to have learned from his missteps as he now has a blog on the Whole Foods web site which gives you good insight into the way he thinks about his business.)

In the case in question, there are a number of statements Mr. Morphis made that are just plain dumb, and probably were reason enough to get him fired by a CEO and Board of Directors lacking in a sense of humor. One example was on March 6th when he said, “Dinner w/Board tonite. Used to be fun. Now one must be on guard every second." But the post that, in my view, he deserves to get fired for was made the following day when he wrote, "Board meeting. Good numbers=Happy Board." Given that the quarterly earnings were not released until March 13, it appears to me that he was making a comment on the upcoming quarterly earnings.  It violates both of the considerations I discuss above: it appears to disclose material non-public information in a selective manner, and it is something that even the most junior investor relations officer would have the common sense not to say. It is clearly, to misquote an old Brewer & Shipley song, one tweet over the line.

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.

Focus on the Fundamentals

I spend a fair amount of time listening to business experts on the Harvard Ideacast and Knowledge@Wharton podcasts. I choose to listen to the podcasts as opposed to read the scholarly articles they are based upon for two reasons: First I find that authors are much more likely to speak in plain English than they are to write it. Second, I spend a fair amount of time cycling to stay fit and listening to podcasts beats hearing my playlist of oldies for the 2,000^th time (and I can hear traffic over the sound of the spoken voice whereas Bruce Springsteen tends to drown out the sound of approaching cars).

One thing I’ve noticed about business experts, whether their field is human resources, finance or management, is that they are all convinced that the insights they bring and the field they are working in are the most important and critical applications for the modern corporation. Almost every expert comes across as being convinced that if company managements would only sit up and take notice of the expert’s crucial insights, companies could solve all of their ills and rake in the profits.

And so it is with investor relations experts as well. Over the past several years as I have observed and commented upon the field of investor relations, I have seen a parade of experts inform us how our lives were going to be radically changed by the latest topic du jour, and that we had better get on the train because it was leaving the station and those that were not on board were doomed to extinction.

Let’s start with XBRL. I first wrote about this topic in January 2009, so almost two years have gone by since I confessed that I didn’t understand the revolution. Guess what? I still don’t understand what all the fuss was about. XBRL sure hasn’t changed my life, and I look at company filings and websites all the time. It may have changed the lives of some programmers that had to map all that data, but to me it just seems like another government mandate that has had little to no impact in the real world.

And how about social media? Has it totally changed your IR program yet, the way all the experts claimed it would? I think the only change social media has made to IR is to give rise to an entire set of new experts that will get you prepared for the revolution they say is coming.

The point here is not that these issues don’t have an impact – they do, albeit a minor one in the scheme of things. These relatively new technologies will grow in importance over time, just as the use of the web and email have, although each new technology brings about its own dangers (see my June 10, 2009 post “Email is Not Your Friend”). The point I am trying to make is that IR practitioners should not let the latest fad overshadow the fundamentals of what we do. And what we do is to ensure that investors have sufficient information to make reasoned investment decisions about our company’s stock. This is accomplished by making sure the information our companies disclose is clear and understandable and presents a complete picture so that investors can make an informed investment decision. Clear and understandable generally comes in two parts: how we plan to make money in the future, back-tested against what the company has accomplished in the past.

The medium of how information gets delivered, whether it is in the form of paper, telephone, fax, email, text messages or social media, is just a tool – the important part is the information itself. So as we move into a new year, let’s focus on the important stuff and make sure that we make sure the basics are covered before we start chasing the stuff at the margin.

More On Social Media and Investor Relations

My goodness gracious, but social media seems to bring out divergent opinions among investor relations professionals. My post last week elicited more responses, both in the form of comments on this blog and in emails, than anything I’ve written over the past two years. Interestingly, the opinions voiced were pretty evenly split; half of the people were proponents of the use of social media in investor relations and half didn’t see the point. Even more interestingly, the half that supported the use of social media were generally those that posted a comment on the blog, while the half that admitted that they, like me, didn’t get it, sent me a one-on-one email.

I thought it might be useful to distill down some of the things I’ve learned over the past week as I have dipped my toe into the waters of social media. In no particular order, here are some of the things I’ve found:

1. Sign up for things and people will start finding you.

In doing research on this topic, I set up accounts on facebook and twitter and worked on updating my linkedin profile. One thing I discovered is that all of a sudden, people started to ask to be my friend on facebook. I don’t know how they knew I was out there, but they found me. The same thing, to a lesser degree, happens on linkedin, but there I can at least see how it happens, as the site shows you how people are linked.

2. You may already be on Twitter.

After I signed up for twitter, I discovered that you can sign up to follow a link called IRbloggers. Lo and behold, when I went there, my latest blog post was listed with a link back to the blog site. Who knew? A close analysis of some of the statistics from my blog shows that for the last month, twitter is actually the fourth most frequent means by which people get to my blog. This is a recent phenomenon, as the same analysis over the past year shows twitter well down the rankings as a referral site.

3. Twitter can get your message out fast.

Perhaps the most common reason cited for the use of twitter is its ability to let people know quickly that more information is available elsewhere, with a link back to the full information set.

4. Twitter can let you know what’s going on in the virtual universe.

Assuming you subscribe to the right feeds, or follow the right people, twitter can give you fast insight into what people are thinking in the webosphere.

5. You can waste a lot of time on this stuff.

Following all the links and feeds takes time, which for most of us is a precious commodity. Robin Tooms, of Savage Design and a social media maven, during Q & A at her Social Media Boot Camp at this year’s NIRI Southwest Conference estimated that she spends an hour to an hour and one-half per day on social media. Personally, I don’t have that kind of extra time in my day and if I did have the extra time, I would want to be somewhere other than in front of my computer.

6. A lot of the stuff is irrelevant or garbage.

Even on a twitter follow site as targeted as IRbloggers, 90% – 95% of what comes across has no relevance to me. Do I really need another distraction in my day wading through the dross to find one or two relevant pieces of information?

7. The digital tsunami is descending on us and we might as well learn how and when to swim.

Where all this comes out no one really knows. The proper etiquette has yet to be figured out. There are certain to be fits and starts into how it comes out in the end, with plenty of unintended consequences along the way. Just because you can be connected 24/7 doesn’t mean that you should be. I’m always amazed when I see analysts who have flown thousands of miles to attend a meeting with management ignore the person in front of them, assume the “Blackberry crouch” and start dealing with emails and other items on the web. Not only is this incredibly rude, but it also makes you less effective for both tasks that you are undertaking. Maybe they’re trying to find the extra hour or two to deal with all the additional information they are being deluged with. In a counter reaction to this type of behavior, this year, for the first time, at the Jones Graduate School of Business, we have to include a statement in our course syllabus banning the use of laptops and cell phones during class because the preponderance of students were not using their laptops for note taking.

I could write more, but I have to go now and update my facebook wall…

Investor Relations and Social Media

Every generation has a point in the development of technology where they hit the wall. For my grandparents’ generation it was color TVs. My grandparents could never seem to be able to tune in their color TVs so that people looked normal – they always had a reddish or green tinge to their skins. For my parents’ generation, the people who were able to survive the Great Depression and World War II, cell phones have stopped them cold. Today’s seniors just don’t seem to be able to grasp what all those cool features on the phone are for – and why would you want a camera on your phone anyway? While I don’t claim to speak for my entire generation, for me, my technological Waterloo has been social media.

I don’t think of myself as a Luddite. After all, I write a blog, my business has a web site, I have an iPhone and I work on a computer most days. I’ve even learned how to send text messages on my phone, as it is the fastest way to get a response from my three college age children. But I confess that twitter and facebook have me stymied. I just don’t get it. Twitter because I’m incapable of saying anything in 140 characters or less and facebook because why would you want to put all that information out there in the public domain? And because I don’t get the social application of these services, I certainly don’t understand their application to investor relations.

First, let’s start with our friends at the Securities and Exchange Commission. The SEC has been very clear that all of the rules that apply to disclosure of information in other contexts also apply to social media. So I guess that means that if you inadvertently twitter a piece of material, non-public information, you must issue a press release as soon as possible thereafter. Of course, if you’ve taken the time to type out the information, I would question how “inadvertent” the disclosure was, which means that the press release should have been issued either before or simultaneously with the twitter. And how do you write a “Safe Harbor” disclaimer in less than 140 characters? These are the sorts of things that will drive your securities law lawyer to distraction, so they are quite possibly inclined to say that you would be better off not twittering about investor relations topics in the first place.

Secondly, who has the time? We all live days that are filled with lots of information flow, meetings, phone calls and other demands on our time. Do you really need another distraction, particularly one as unfiltered as social media tends to be? In a business context? I remember in the early days of email having a colleague extol the virtues of email because it bypassed all the filtering layers of a corporation, allowing anyone to communicate directly with you. These days I look at the constant stream of email that flows through my computer and sincerely wish for better filtering devices. And I don’t even work in a corporation, with its constant stream of emails from Human Resources, Security, IT, meeting and calendar reminders and notices of the annual golf outing, charity events and other odds and ends.

Finally, let’s not forget the primary mission of investor relations, which is relating to investors – making sure they understand your company and its prospects so that they can accurately value the company and its stock. Call me old fashioned, but I believe that this means that you actually have to talk to investors, listen to their questions and give them thoughtful responses. For that, the best, most efficient piece of technology that you have was invented in 1876. It’s called the telephone.

I suppose that over time social media will create a niche for itself in business, but for the present, to me, it seems over-hyped. I believe that truly sophisticated technology simplifies you life rather than adding more complications. And I don’t see how social media makes your life simpler.