Category: Technology

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

Published by

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.

*        *        *        *        *

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.

Directors Exploring the Digital Future

Published by

 

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.

The Connected Boardroom

Published by

A couple of NACD’s members recently attended the Consumer Electronics Show in Las Vegas and have blogged their reports from the future for the information of the director community. First: Fay Feeney from NACD’s Southern California chapter.

I just got back from my first visit to the Consumer Electronics Show (CES) in Las Vegas. As much as I enjoyed the first look at the gadgets, my attention was on the CEOs who spoke about this $186 billion U.S. consumer electronics industry. When I listen to a CEO, my focus goes to the support, guidance and contributions coming from the board chair and directors.

It was a great experience, with a very special invite from Walt Mossberg and Kara Swisher of AllThingsD to attend the Wall Street Journal Digital @ CES session. As a Twitter user, hearing about their business strategy from the CEO, Dick Costolo, was a treat.

I also attended a CEO/chairman session with Jeffrey Immelt, CEO and chairman, GE; John Chambers, chairman and CEO, Cisco; and Ursula Burns, chairman and CEO, Xerox. They gave me a new appreciation for the challenges of leading a global company headquartered in the U.S. The overall mood was optimistic, yet with concern about the need for infrastructure investments to support the future. They are selling to global markets and made it clear that the U.S. opportunities are 300 million people vs. the projected 7 billion worldwide.

 The CES highlighted some key trends in the developing electronics industry:

1. Disruption and invading rivals’ turf. Tearing down walls between industries and platforms was the focusSteve Ballmer, CEO at Microsoft, started his CES keynote with an example about creating a future version of Windows that runs on both Intel-compatible x86 chips as well as ARM-based processors being developed by Qualcomm, Texas Instruments and NVIDIA.

Then Samsung announced a deal with Comcast and Time Warner Cable to put their programs on Samsung’s TVs and other gadgets. This web-based content allows Samsung to provide the cable companies a way to break out of their geographic territories. This kind of deal liberates content, breaking down artificial barriers.

2. 4G and Smartphones arrive. Fast connections are here which make mobile devices work anywhere. Verizon 4G service will cover 100 markets with more than 175 million people by the end of 2011. Lowell McAdam, Verizon CEO, said that faster broadband will spur innovation and create jobs for those who exploit the networks.

3. Tablets and mobile are here to stay. The Motorola Xoom was one of the most impressive among the 80-plus models of tablets that were at the show. Motorola is reportedly aiming to sell one million Xoom tablets in the first quarter of 2011.

4. Glasses free 3D. These still have a way to go to get past the hype. Lots of 3D TVs and content filled the halls.

5. Motion controls move to the PC and beyond. Microsoft Kinect shipped more than 8 million units in 60 days, proving that Xbox 360 gamers want motion control. That quite possibly makes Kinect the most popular consumer electronics gadget in history.

So what can a boardroom do to keep up with these trends?

I believe the time is now to embrace these trends for your business. The time is right for chairmen to explore how the connected, social movement of customers is impacting their boardroom and business. It is becoming a 2011 imperative for business strategy.

Social networks are changing the world, with a mission to empower people by giving them a broadcast platform. They are constructed to make people more powerful, have more control and be more aware. Social networks have given individuals the ability to express their views to friends and the world.

During the session, Kara Swisher asked Twitter CEO Dick Costolo to give us the company’s vision and goal, in light of their recent growth and investments. Twitter Inc. gained more than 100 million registered members this year and approaches the new year with a fresh investment of $200 million. Now it must prove it can live up to its newly elevated valuation of $3.7 billion.

Costolo said that “40% of all tweets come from mobile devices. This is another way of demonstrating mobile’s increasing importance to the social media company. This is up from around 20% to 25% a year ago.”

When I speak with directors about using Twitter as a source of board information, I still get a nervous laugh. Now that I know Twitter’s business strategy I hope we can have a conversation on how it can be used as an independent listening channel for a brand.

 “We want to instantly connect people everywhere to what’s most important to them,” he said. He expanded on that by saying Twitter is about connecting for a purpose, not just connecting. Some people use Twitter just to keep up with their friends or interests; others use it as their daily source of news.

The new vision falls in line with Twitter’s re-branding as an information network. It isn’t focused on just social connections but rather on connections between “tweeters” and relevant information, whether that information is from a company, a celebrity or a close friend.

My time at CES strengthened my belief that chairmen who are interested in seeing their boardrooms adapt to this new transparent, engaged business environment will be rewarded. I leave you with a question for 2011: How will your board confront this world changing movement?

Fay Feeney, CEO at Risk for Good (www.riskforgood.com), helps corporate board chairmen monitor, leverage and govern the fast moving landscape of social media and the internet. The impact of this movement is changing business strategy. We apply our expertise in risk management to help corporate boards and CEOs survive and thrive in this digital landscape.