Recently, the popular press has been filled with a number of articles that question whether social media sites like Facebook and Twitter are appropriate channels for releasing material operating information. Many of these have appeared in the wake of the Security and Exchange Commission’s release of an investigative report on Netflix. But how can we forget the numerous cases almost two decades ago of companies disclosing significant non-public information to analysts and/or “selected” investors before making full disclosure of the same information to the general investing public? How could we have become so desensitized to insider trading threats?
Well, this Grumpy Old Accountant is still bitter about past management reporting abuses, and sees today’s social media as creating new risks for financial reporting transparency. Most of today’s social media pundits have failed to address the advantages and disadvantages of using specific social media tools for distributing financial and operating data to the markets. Is one tool better than another for insuring transparency? Could social media be the latest mutation of the “selective disclosure” virus?
To address such concerns, I penned the following article for Corporate Finance Insider, a publication of the American Institute of CPA’s.
Is social media worth the risk for reporting earnings?
Three guiding principles for companies to consider as they weigh using a blog, Facebook status update or tweet to send out material information.
June 6, 2013
It is now the norm for public companies to distribute financial, regulatory, and stock-pricing data to the markets via investor relations sections on their corporate websites. In fact, many analysts and investors actually prefer such websites to the SEC’s EDGAR tool because investor relations sites often present downloadable data in a variety of formats, from PDFs, to Excel to HTML. So common is this medium that many consider it a “red flag” when a public company does not provide such information access.
The recent Netflix experience sparked debate on a different form of digital delivery of material information—the role of social media. Netflix CEO Reed Hastings last July posted, on his personal Facebook page, company operating data that had not previously been reported in a press release, Form 8-K, or on the company’s website. The SEC initiated an investigation and recently issued a final report (Release No. 69279), in which it decided not to pursue an enforcement action. Yet, the securities regulator did emphasize that social media communications require “careful Regulation FD analysis,” and that investors should be alerted to how companies plan to use social media channels to distribute information.
The Regulation FD issue has its roots in the SEC’s attempts to curb insider information at the turn of the 21st century. So, the real question today is not whether social media is “good or bad,” but whether these channels might actually contribute to “selective disclosure” that might promote trading abuses. This article suggests three guiding principles for companies considering social media for releasing material information: simplicity, caution, and control.
Where are we today?
While Twitter, and even Facebook status updates, may convey more timely data, it is at a potentially high cost. Message length limitations combined with the speed with which tweets and updates are generated may detract from decision usefulness, relevance, and representation faithfulness.
Additionally, a recent study questions whether corporate managers are really ready to use social media to distribute operating data. A report issued by Stanford University’s Rock Center for Corporate Governance in conjunction with the Conference Board found that most companies appear to be relatively unsophisticated when it comes to formally gathering data from social media and incorporating them into corporate strategy, operational plans, and risk management. Why then would anyone expect them to be sophisticated in terms of how they use social media to disseminate data? The study also acknowledged the potential for misinformation in the market when information shared among social media users is not verified.
Despite its global following of more than 1 billion users, Facebook has not been used much to distribute corporate performance updates despite a high character limit (more than 63,000) for “status updates.” However, a number of companies have taken to blogging to distribute information. Dell, for example, uses its DellShares blog site to provide “new insights and perspectives into Dell and the world of investor relations.” As shown below, Dell also uses this blog to report quarterly earnings information and related commentary.
Corporate blogs generally appear to be valid means of distributing operating data as long as the disclosures are complete representations of what a company has reported through press releases and Forms 8-K. In short, blogs appear to be useful “supplements” and possibly even “substitutes” to a company’s traditional financial reporting channels, as long as they meet the SEC’s most recent social media guidance issued in August 2008 (Release No. 34-58288).
However, a handful of companies recently have begun using Twitter as an information distribution channel for operating data. For the month ended April 2013, Dell, eBay, and PepsiCo reported a significant number of followers and posting volume:
- Dell has two Twitter accounts: @Dell for official news and tweets and @DellShares for information and insight for the investor community. @Dell had more than 68,000 followers and more than 2,600 tweets, while @DellShares had far fewer followers (almost 5,500) and tweets (fewer than 800).
- eBay’s official Twitter news feed, @ebayinc, had more than 14,000 followers and 10,000 tweets.
- PepsiCo’s official home on Twitter, @PepsiCo, had almost 83,000 followers and more than 17,000 tweets.
But as last year’s Netflix case suggests, the emerging use of social media channels such as Twitter and Facebook are not without their own unique set of challenges. A strength of these communication channels is undoubtedly the speed with which data can be transmitted to “followers.” However, the SEC’s concern is whether the number of Twitter “followers” is sufficiently large as to ensure “non-exclusionary” distribution of information. In the cases of Dell, eBay, and PepsiCo, it is unlikely today that Twitter could replace the companies’ traditional information distribution channels.
The quality of information posted on Twitter also raises questions, given its maximum message length of 140 characters, which necessitates the use of numerous postings to communicate a message. Look at the numerous tweets posted by Dell in a recent earnings release:
These tweets prompt one to wonder if the intended message was communicated completely and accurately. Also, remember that Dell has two Twitter accounts. Did investors know which one to follow for the earnings release? One is left wondering why it was so important to “rush” this limited information disclosure to the market. The author prefers eBay’s approach, which used Twitter to warn investors of an upcoming earnings release and provided a link:
Later, when the company did report selected information, it also warned followers that its tweets were not complete:
The above tweets suggest that eBay explicitly considered not only Regulation FD, but also Regulation G, which deals with the reporting of non-GAAP financial metrics. This suggests regulatory compliance might actually be complicated by the use of social media.
The old adage says, “If it ain’t broke, don’t fix it.” If the corporate investor relations page is getting the job done, there’s probably no reason to change it. For unsophisticated and/or resource-constrained companies, it is probably best to stick with the investor relations page as the primary information distribution tool. The more adventurous corporate social media users might consider blogging, but only after linking content to corporate investor pages. If a company needs to quickly alert the market to a fresh piece of operating data, it might consider using an occasional tweet or status update that directs followers to a link to the appropriate corporate webpage.
When it comes to today’s developing social media, two sayings seem particularly appropriate: “speed kills” and “haste makes waste.” SEC disclosure guidance in this area is developing, and corporate tweets and Facebook status updates are likely to attract regulatory scrutiny. Corporate executives need to do a cost/benefit analysis and ask themselves whether a brief corporate announcement is worth the potential legal and regulatory headaches that it might create. Again, if Twitter, Facebook, or the like must be used to alert markets, simply announce that new data is available at the corporate website, and include a link to it.
Companies need to control their social media technologies. At a minimum, they need formal governance and control procedures to ensure accuracy, completeness, and regulatory compliance. This does not need to be that complex. A simple start would be to have any corporate-related social media “burst” reviewed and approved by an appropriate authority who could ensure compliance with applicable company and regulatory guidelines. This might slow down the marketing department a bit, but, as noted above, “speed kills.”
The potential regulatory compliance and information accuracy risks associated with social media information distribution are simply too great and clearly outweigh any benefits that a quick tweet or status update might provide. Focus on simplicity, caution, and control when using social media for distributing company operating information.
This essay reflects the opinion of the author and not necessarily that of The American College, or Villanova University.