INVESTOR RELATIONS professionals at hundreds of companies are exposing their firms to potential compliance risks because they have failed to play an active role in monitoring, managing and engaging in their companies’ activities on social networks like Facebook and Twitter.
Our research of the social media activities of almost 700 public companies has identified widespread instances of companies putting themselves at risk through practices they would almost never consider doing on their corporate websites.
These compliance issues are arising mostly because investor relations departments have taken a hands-off approach to their companies’ social media activities, even though investors and analysts are increasingly using these channels to keep informed about their holdings.
In the absence of dedicated investor relations accounts on social networks, investors are turning to corporate accounts managed by inexperienced employees who are unfamiliar with the complex rules, laws and expectations that govern communications to investors.
The result is a virtual free-for-all where companies as diverse as blue-chip brand names to obscure penny stocks are behaving as if the social web is beyond the reach of securities laws.
But guidance from securities regulators is clear. The U.S. Securities and Exchange Commission (SEC) says that all communications made by or on behalf of a company are subject to the antifraud provisions of the federal securities laws, including on Twitter and Facebook.
And the SEC also advises companies to establish controls and procedures, and to monitor company activities on the web, something that many IR departments are obviously not doing.
Our research of corporate social media has identified three key compliance concerns:
- Widespread linking to and republication of third-party content, including select sell-side analyst stock targets without adequate disclaimers or explanatory language;
- Almost universal inconsistent use of disclaimers for forward-looking statements and non-GAAP financial measures; and,
- Poor synchronization of information distribution, leading to investors who follow company accounts on social networks receiving information up to several hours after its release to other channels.
To be clear, a knee-jerk prohibition against non-IR staff covering investor-related information is not an option because doing so will make companies’ social media activities less relevant and useful to investors.
And while adopting social media policies and implement training programs for web community managers on disclosure laws should be standard practice, they are insufficient because managing public communications in dynamic environments such as social networks is a challenge even for experienced investor relations professionals.
To help protect their companies against unnecessary risks, investor relations departments must now actively participate in their companies’ social media programs or establish their own IR accounts on social networks.
3rd-party content risks
A surprising number of companies are using their Twitter and Facebook accounts to provide links to third-party content about their financial performance and prospects for their stocks. In some cases, companies are posting headlines and links to highlights from sell-side analyst research, including specific stock price targets.
Philosophically, I don’t have a problem with companies providing access to useful third-party information. Making it easier for retail investors to access a range of perspectives on a company gives them more information and insight on which to base their decisions. Better informed investors are good for capital markets and for investor protection.
But there are well-established guidelines for companies to follow when they decide to refer investors to third-party commentary and information. It’s one of the trickier areas of IR communications on the web. Investors must be made aware of the company’s level of involvement in the creation of the third-party content, and you should explain why you’re directing them to it. And companies must be prepared to provide both positive and negative content.
Social media also introduces new types of implied or explicit endorsement for third-party content. On Facebook, for example, “liking” a user comment or post could be construed as the company endorsing its statements. Meanwhile, the common activity of “re-tweeting” (forwarding) messages on Twitter could also be construed as the company endorsing a particular message.
Prohibiting links, likes and retweets is not a solution because all of these activities are vital components of successful social media engagement. IR department representatives have to be actively involved in monitoring and engaging in social media. And they need to understand how social networks function so that they can better assess their companies’ potential liability on an instance-specific basis.
I have previously written at length about the challenge of using Twitter for IR where there is no room in the 140-character limit for disclaimers to accompany messages. But even on Facebook, where disclaimers can be provided with some forethought, companies typically neglect to provide them.
Frequently, company provided guidance, including point- or range-based estimates, and forward-looking statements about management’s future expectations are provided on company social media accounts without accompanying cautionary language. Meanwhile, reconciliations of non-GAAP financial measures are not being provided or linked to.
While I’ve never thought that disclaimers are useful to investors, the fact is they are a necessary evil and vital protections for companies.
Poor synchronization of important news
When investors and others are invited on a corporate website to follow the company on a social network, they have an expectation that the company will keep them informed in a timely manner of important news. In some cases, companies explicitly or implicitly position their social network accounts as channels through which investors can receive timely updates.
However, many companies aren’t meeting their end of the bargain. Often, important news like earnings announcements is posted to company Facebook pages and Twitter streams long after it has been made available through other channels, such as PR wires or postings on the company’s website. In some cases, important news isn’t mentioned at all.
For a typical example, see the post I wrote in January on our Bits blog about Yahoo!’s Q4 2009 earnings announcement. In that case, Yahoo! failed to inform its followers on Twitter that the company’s results had been published for more than an hour after they had been posted. And when they eventually did tweet the information, they chose to link to a glowing third-party account of the results rather than to the company’s release.
This sloppiness is setting companies up for trouble. If a company decides to start using Facebook and Twitter for its news, then it has an obligation to make sure that news is distributed to those channels in a timely manner.
Regulations are no excuse to ignore social media & compliance
Ironically, investor relations departments often invoke regulatory burdens as the main reason that they avoid getting involved in, or even monitoring, their companies’ social media activities. But that is mostly little more than a convenient cover for IR departments’ aversion to engaging with main street retail investors, financial advisors and smaller institutions.
Regulation FD, which governs selective disclosure, is most often cited as a reason for IR departments to avoid social media. But the fact is, social media is mostly public so any material non-public information that is inadvertently disclosed on Facebook or Twitter is much less “non-public” than the same information disclosed in a private setting, such as in a phone call with an analyst or in a private group or one-on-one meeting with management. Companies can also take steps to ensure that their activities on one network are syndicated to followers on other networks and to their corporate websites.
By failing to get involved in their companies’ social media activities — and using regulation as a convenient cover — investor relations departments have left their companies exposed to regulatory sanction and shareholder litigation.
In short, they are not doing the jobs they were hired to do.