SEC May Not Be Protecting the Public Interest
A recent Conference Board study examines the use of social media by S&P 1500 Index companies to disseminate ﬁnancial information and the response from investors and traditional media. The ﬁndings show that companies use social media to overcome a perceived lack of traditional media attention and that social media usage improves the company’s information environment.
Social Media Communications
There is also evidence that, in contrast with other types of company communications, the beneﬁcial effects of social media on the company’s information environment are offset when the investor-focused social media communications are disseminated by other social media users. The ﬁndings are relevant for managers and boards establishing corporate social media disclosure policies, since they suggest that companies may beneﬁt from developing different approaches to disseminating positive versus negative earnings news.
The ethical question is whether by allowing social media postings of financial information, the SEC has opened the door to false and misleading disclosures because not many investors are familiar with all platforms and the SEC hasn’t developed a cogent set of rules for social media postings.
Back in April 2013, the SEC issued a report that makes clear companies can use social media outlets like Facebook and Twitter to announce key information in compliance with “Regulation Fair Disclosure (FD)” so long as investors have been alerted about which social media will be used to disseminate such information. Regulation FD mandates that all publicly traded companies must disclose material information to all investors at the same time.
The SEC’s position is that “One set of shareholders should not be able to get a jump on other shareholders just because the company is selectively disclosing important information. Most social media are perfectly suitable methods for communicating with investors, but not if the access is restricted or if investors don’t know that’s where they need to turn to get the latest news.” This seems to be a nebulous standard to me because how are we to determine that all investors know where to look for the information on social media?
Recently, Netflix social media disclosures informed investors: “Investors and others should note that we announce material financial information to our investors using this investors website, SEC filings, press releases, public conference calls and webcasts…It is possible that the information we post on social media could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on the U.S. social media channels…”
To me, this is scary stuff. Netflix is vague to say the least about its “social media channels. Moreover, regulatory requirements on social media postings have not caught up with the technology and there’s probably an infinite number of places on the Internet to discuss these results.
The SEC recently reported on an investigation of Netflix that stemmed from an inquiry the Division of Enforcement launched into a post by Netflix CEO Reed Hastings on his personal Facebook page stating that Netflix’s monthly online viewing had exceeded one billion hours for the first time. Netflix did not report this information to investors through a press release or Form 8-K filing, and a subsequent company press release later that day did not include this information. The SEC did not initiate an enforcement action or allege wrongdoing by Hastings or Netflix recognizing that there has been market uncertainty about the application of Regulation FD to social media.
Here’s a question for you to consider: Can Goldman Sachs Tweet its earnings in 140 characters or less?
This is what it did in October 2015. The bank released its third-quarter earnings using a combination of social media and its own website. The announcement came via Twitter and linked back to its own website.
But when it comes to earnings, Goldman and others should be careful what it tweets. Earnings releases are monitored by the SEC. Companies are permitted to report earnings as they like, and more and more companies do. But if they decided to use a non-standard way to report profits—say, exclude the cost of stock options, or one-time expenses, which more and more companies are doing—they are required to also disclose earnings figures that comply with standard accounting rules. That’s easy to do in a long press release, but might be harder to do in 140 characters.
Protecting the Public Interest
I fear the SEC has opened a Pandora’s box when it comes to posting financial results on social media. I can envision companies using accounting standards that are not generally accepted and confusing investors with respect to earnings results that should be based on generally accepted accounting principles. The SEC needs to act now and issue specific guidelines on what are acceptable and unacceptable ways to use social media to post earnings information to protect the public interest and ensure such information meets the dual standards of fair and full disclosure.
Blog posted by Steven Mintz, aka Ethics Sage, on October 27, 2016. Dr. Mintz is Professor Emeritus from Cal Poly San Luis Obispo. He also blogs at www.workplaceethicsadvice.com.