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Social Media and Compliance – It’s All a Matter of XYZ

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Despite the SEC’s 2008 interpretive admonition that all communications made by or on behalf of a company—even those made by employees on social media, blogs, and shareholder forums—are subject to relevant provisions of federal securities laws, widespread corporate adoption of appropriate compliance procedures in that regard remains elusive at small and large public companies alike. In an eye-opening IR Web Report article published in April 2010, Dominic Jones set forth a litany of issues facing investor relations professionals with respect to social issues, arriving at the austere conclusion that at literally hundreds of public companies studied, investor relations professionals are exposing their companies to material compliance risks by failing to suitably monitor the use of social media.  One of the principal impediments to widespread boardroom assessment of these risks is that many directors simply don’t have substantive experience with social media, its use, misuse, and potential legal and regulatory consequences.

To illustrate the potential scope of issues of which directors should be aware in this regard, consider the following hypothetical:  XYZ is a public company that manufactures widgets.  XYZ has an investor relations manager, and several employees throughout the organization who regularly contribute to XYZ’s website, XYZ’s industry blog, XYZ’s Facebook and Twitter accounts, and occasionally to their own Facebook and Twitter accounts.  XYZ is planning on releasing its quarterly earnings press release at
1:00 pm ET (during market hours) on its website; the results are far in excess of consensus estimates.  At 12:50 pm, a third-party financial blog that follows XYZ posts a note to the financial blog’s Facebook page stating that its “channel checks weren’t impressive – going to be a tough quarter for XYZ.  That said, we love their new ABC 5000 widget which will be a HUGE winner for them.”  At 12:52 pm, Sally, from XYZ sales and marketing, replies on the financial blog’s Facebook page that she “like[s] this posting,” and puts a link to that Facebook page on XYZ’s industry blog.  At 12:54  pm, Jim, an XYZ engineer, responds to a pejorative Tweet about XYZ by a friend who works for XYZ’s largest competitor, by posting a link on his personal Twitter page to a summary of a third-party analyst note reiterating that XYZ is a “strong buy.”   At 12:56 pm, Larry, XYZ’s investor relations manager, updates XYZ’s official Facebook and Twitter pages to remind people that the earnings release is forthcoming, but erroneously instructs people to look for the release on the wire, instead of at XYZ’s website.  The earnings release is posted on XYZ’s website precisely at 1:00 pm ET, but isn’t picked up by the wire services until 1:03 pm.  During the three-minute gap, the stock rises 10 percent.  Later that afternoon, Margaret and some of her overworked, dissatisfied colleagues in XYZ’s factory intentionally and untruthfully “tweet” in their personal Twitter accounts that the ABC 5000 is being shipped with a critical design flaw. The next morning, one of the research analysts covering XYZ elects to downgrade the stock due to the prior day’s price increase, but since it’s not good news, Larry decides not to state anything about that on XYZ’s website, Facebook or Twitter accounts.

As fanciful as it might sound to directors who are less social media savvy, fact patterns like these are playing out routinely, and the panoply of issues created in the process can be vexing.  Though Sally mightn’t have been intentionally seeking to mislead investors, what does it mean to an XYZ investor when an XYZ employee says they “like” a financial blog posting which predicts, among other things, doom for XYZ’s impending quarter; what if an XYZ investor reasonably relied on that and sold her stock eight minutes before a 10-percent rally? Similarly, Jim mightn’t have intended to mislead his Twitter followers by directing them to a summary of a positive analyst report, but are there ramifications to XYZ for its  employee omitting regulatory disclaimers in connection with what can be construed to be investment advice? Larry didn’t intend to misguide investors by directing them away from XYZ’s website for the earnings release, but, having done so, the three-minute news lapse could well have been costly to certain investors given the stock movement. Lastly, the intentionally false and misleading Tweets by Margaret and her colleagues are, per the SEC’s interpretation referenced above, attributable to XYZ.  It’s also plausible that Larry’s purposeful omission of the analyst’s downgrade could garner some regulatory attention if XYZ’s website, Facebook and Twitter accounts are, by design, places where the preponderance of XYZ’s investors are induced to get their information about XYZ.

Whether attuned to social media or not, a practical way for directors to start evaluating these risks is by simply providing this hypothetical to a company’s communications managers in advance of the next board meeting, and asking appropriate personnel to make a presentation about how and to what extent there are procedures in place to effectively manage these and associated risks. One thing’s for certain: these are challenges that are going to multiply, not diminish.

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Adam J. Epstein, an NACD member, is a director of OCZ Technology Group, Inc., and is the founding principal of Third Creek Advisors, LLC (“TCA”), which acts as a special advisor to small-cap boards with respect to corporate finance and capital markets. Prior to founding TCA, Mr. Epstein was co-founder and principal of Enable Capital Management, LLC, an investment firm whose funds have invested directly in hundreds of small-cap companies.  Preceding several senior operating roles in retail and technology, Mr. Epstein began his career as an attorney at Brobeck, Phleger & Harrison.  Mr. Epstein has been featured on CNN, ABC News, and in The Wall Street Journal.  Mr. Epstein can be contacted by email at ae@thirdcreekadvisors.com.

Selecting a Lead Director – Everything Is Subtle

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I had the privilege of joining over 30 public company directors this week to discuss lead directors—what they do and how to pick them. Wow, what a lively discussion it was. 

Ted Dysart

Ted Dysart

We were fortunate to have our partners from Heidrick & Struggles there—Ted Dysart and Stephen Miles, who are both vice chairmen for this leading executive recruitment firm. Through a very candid dialogue, we were really able to dig into this topic. At the session, and in many praiseworthy emails following this gathering of esteemed directors, I heard many common suggestions that all boards can put into action. 

Stephen Miles

Stephen Miles

The key takeaways? Everything is subtle; just work through the details, expectations and preferences that fit for your situation.

Beyond the subtleties, three key themes did emerge for me:

  1. Role: Define expectations first. How will the CEO and management team work with the chairman or lead director?  What do we expect him/her to do? 
  2. Criteria: What skill sets and experiences are required, preferred and desired?  Surprisingly, this aspect of the process is really no different from other director hire decisions, but many boards overlook this critical step. 
  3. Process: Have a process and make it transparent. No need to keep your selection process a secret from your fellow board members. They can help you identify key criteria and you want them invested in the success of whomever you select as your next board leader. 

While many other items were discussed, here are a few that rose to the top for me:

  1. Term limits/rotation: No consensus…all over the board: Yes, no, perhaps.  
  2. Time commitment: Ensure this person is willing to make the commitment and has the time available after making that commitment.
  3. Crisis and succession: Ensure this person is willing to take on a key role in times of crisis. You never know what can happen, and the lead director needs to be ready to step up, whether as interim CEO or chair of a search committee.
  4. Experience: This leader should be seasoned and savvy (some felt, ideally, from the company’s industry), and can act as a sounding board for the CEO, management and others on the board.
  5. Trust: This is a “no kidding” area, but many emphasized the need to ensure the lead director check his/her ego at the door and not have a personal agenda.
  6. Collaboration: Near the top of requirements, the lead director needs to be a strong team builder with exceptional listening skills. Is he/she a facilitator? 
  7. Raising the bar. One passionate participant even suggested that all boards separate the chair and CEO roles. Perhaps this director was thinking about asymmetric information risk. No matter; we assured the participants that NACD does not advocate for specific board structure, rather, it’s situation-dependent—
    i.e., it’s subtle! Combined chair/CEO roles make sense for some companies, and separating the roles is appropriate for other companies.

In closing, I wish I had brought copies of page 10 from the Report of the NACD Blue Ribbon Commission on Board Leadership. The chart on page 10 summarizes the relationship of the leader of the independent directors and the CEO and their respective areas of responsibilities. 

 Net net: this topic is hot, and we are exploring the optimal next steps to help directors continue to advance exemplary board leadership.

Directors Exploring the Digital Future

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Another year, another Consumer Electronics Show (CES). I have been attending these for over 30 years. Everyone wants to know—was there one big thing? Unlike other years, when there were gigantic flat-panel screens or 3D last year, there was no one big thing this year. Yes, 80 iPad contenders, but that is not revolutionary.

However, the forces leading to major, massive changes that will affect every consumer and company worldwide are being unleashed:

  • Convergence: We have gone from convergence of digital content to give us “edutainmentgaming,” to multi-delivery channels leading to what many of the tech leaders are calling content anywhere, anytime and anyway you want it on up to N-screens. More screens—many smaller, all synchronized—that will let you read, text, watch TV or a movie—seamlessly, instantly, and sometimes simultaneously.
  • But where will be the points of leverage? Will the network be the computer as we hear Verizon tout its impressive offerings? In the devices, as Samsung and others show their integrated, products from Smart TV to cameras to appliances? Or in the content, as the Hollywood crowd and the ad agencies return in force to CES? Is content still king? Does Comcast have something with content and delivery in its NBC acquisition? Or in the apps on devices and in the “cloud”?
  • Back to the Future: All, including Ford and Audi (hardly your typical consumer-electronics company), talk about the “cloud,” the ability to do computing in servers connected by networks, or what we used to call timesharing. There is the slight problem of bandwidth, but with technology and the FCC looking again at spectrum, can that too be resolved?

Ford's display at the 2011 Consumer Electronics Show

  • What does this mean to companies?
    • The future of all industries will be profoundly affected by the new technologies. Just think of the black rotary phone vs. the smartphones and iDevices. The future portends even more profound changes.
    • The customers of the future, the Y generation and Millennials will be more demanding in how they are sold and serviced. And, don’t forget the boomers who will growingly seek solutions to health, aging, security, preserving their minds, mobility and relationships through technology.
    • Competition is global and those who can best utilize the new technologies to better provide solutions vs. just products to the world will win.
    • The U.S. as a country is not producing the citizens we need to compete. We are failing at K-12, education-wise, and with the dearth of scientists and engineers we are producing, cannot compete in the future. Our policies since 9/11 have hurt us in terms of attracting and retaining the best and brightest and there should be a “call to arms.”
    • The Coca-Cola Company (also not a typical consumer-electronics company), which is top branded, really gets this. Coke sends 40 folks to the CES to understand what the new technologies mean in terms of marketing, branding and customer relationships.
    • Board members should really consider attending and strongly urge their marketing, product and technology folks to attend. Remember the transistor and silicon chip?  We are moving towards a new world when the consumer technologies will drive much of what industry will need to produce, promote, sell and service the offerings of the future.
    • Can any company which must use or deal with technology afford not to understand what is happening in the future?
    • Join us next year.

Carolyn Chin is president of NACD’s Florida chapter. She is chairman of the board and CEO of Health Wellness Solutions, a developer and marketer of new pain and brain/memory enhancement products. She also serves on the State Farm Bank board, and is a member of the audit, governance, and ALCO (as chair) committees. Her other board experience includes serving as chairman of Commtouch, and chairman of Kindmark. Ms. Chin founded and managed the global e-commerce services business for IBM.