Over the year ahead, the Securities and Exchange Commission is expected to face a full slate of challenges related to corporate governance and financial disclosure. In particular, the Commission will be reviewing the possible regulation of proxy advisory firms and studying a switch to biannual reporting, among other issues.
To find out what market observers see as the best ways to address these matters, Mergermarket on behalf of Toppan Merrill spoke with four experts.
Toppan Merrill question: In 2018, Elon Musk reached a settlement with the SEC over his Twitter comments about taking Tesla private. Do you expect disclosure issues on social media to become more frequent this year and in coming years? What safeguards should companies put in place to prevent such problems? Leading industry experts weigh in...
Professor Charles Whitehead, Cornell Law School says: Creative, aggressive, and maybe even obstinate CEOs are not new. It's the nature of a CEO that you're going to be a little bit headstrong and, in most cases, that you're going to be focused on getting your views out there. Elon Musk seems to fit that model.
But a seasoned CEO understands that she’s got to temper that sort of drive with an understanding of the regulations, and more importantly, an understanding that what you're saying publicly may have real repercussions. We’ve seen CEOs who have said things in speeches that they shouldn't have said, or said things to reporters that they shouldn't have said, or issued press releases that they shouldn't have issued. And what happens? The exact same thing that happened to Elon Musk. The difference is that he did it through Twitter.
The critical difference today is that it's easier to convey information directly to the marketplace because of new technology. But the basic problem, which is that headstrong CEOs sometimes do things they shouldn't do, and communicate information they shouldn't communicate, has been around for decades. This raises a concern, since we are in a phase where a lot of startups, with new CEOs, are accessing the capital markets, and these CEOs are often less tempered than the CEOs of companies that have been around for 100 years. The fact that you can get information out quickly through tools such as Facebook and Twitter has the potential to become a real issue, because now the CEO can go directly to the market without having information vetted through investor relations, press officers, and lawyers. What that means is that a CEO should be told, "Before you tweet something, show it to somebody" – just like before you issue a press release you would vet it with the right people.
Lona Nallengara, Shearman & Sterling adds: The method that companies communicate with shareholders, customers and the market is changing. Years ago, a newspaper ad or a press release was the primary form of communication. Today, often, the time it takes to draft and post a press release may be too long to react to a fast-moving story or an event at your company. I think the SEC recognizes that. The SEC recognizes that investors and the markets consume information from a variety of sources and the SEC does not want to weigh in on what methods of communication are the best ones or decide which ones work or not. The SEC simply wants to make sure that investors have access to the communication methods used and that investors know that a company will be using an identified yes, companies will continue to use different forms of communication, and increasingly these will include social media. It started with websites and then company Facebook pages and Twitter posts. As companies seek to be more connected with customers and investors, communicating using the same, common technology will be important.
As more and more companies seek to use social media, they are also increasingly seeking to give their CEO a presence on social media. It is important for companies to look at all social media, including the personal posts of a CEO or other executives, in the same way as they would look at any communication by the company. Social media posts, including personal executive posts, should be subject to the same rigor as any other communication of the company. Before any communication, social media or otherwise, companies should be asking: Is the information we are communicating material to our business? Are the appropriate individuals in the company aware of this communication? Have we said it anywhere else before? Does this communication trigger any specific disclosure requirement? Are there any reputational issues with the form, content or timing of this communication? And, most importantly, is the content of the communication true? These questions are relatively standard to consider in connection with preparing and issuing a press release, but it can be more challenging as a CEO tries to post a 280-character message on Twitter. Nonetheless, it is important to bring a comparable set of disclosure controls and procedures to a social media post, even ones by a CEO in her personal capacity. A CEO speaking will be viewed as speaking for the company and a post from the CEO can have immediate and significant impact on the stock price and market perception of the company. Companies can get into trouble with the SEC if they have not designed disclosure controls to contemplate social media posts.
Scott Kimpel, Hunton Andrews Kurth weighs in: What’s really interesting to me is the disruptive effect of social media on the SEC’s rules governing disclosure of information to investors. The SEC continues to exert tight control over companies’ ability to distribute information, principally through the enforcement of so-called Regulation “Fair Disclosure,” which most people shorthand to Regulation FD. My personal view is that Regulation FD may run afoul of the First Amendment insofar as it prohibits otherwise truthful speech, particularly in light of the Supreme Court’s jurisprudence concerning corporate speech over the past several years. But an even bigger problem with Regulation FD is that it was adopted in 2000, many years before the emergence of the 24-7 news cycle, the advent of social media or the widespread availability of smartphones. The SEC did not (and probably could not) contemplate these technological developments.
Investors today would prefer to have instantaneous access to information, and don’t necessarily want to wait for the next earnings call or 10-Q filing to get it. They also want the information in a format they are accustomed to, and for most retail investors that does not entail going to the SEC’s byzantine website or even the investor relations tab of their favorite public company. It means having the information ready to go in social media. And the SEC procedure for companies to disclose investor information through that channel is clunky at best. I share some ideas for modernizing this process with your next question, and hope that the SEC will revisit this area sooner rather than later.
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