By: Norma Leticia Leal
Autonomous Technological Institute of Mexico

It is undeniable that the technological advances of social media outlets have transformed the way businesses communicate with the public and in particular with investors. Currently, the general director of a company and the members of senior management may disclose corporate information via Facebook, Twitter, Tumblr and other online media as well as traditional means of communication.

Currently, the general director of a company and the members of senior management may disclose corporate information via Facebook, Twitter, Tumblr and other online media as well as traditional means of communication.

Typically, businesses listed on the stock exchange disseminate information through reports submitted to the regulatory marketing body (the Securities and Exchange Commission, SEC, in the United States, or the National Banking and Securities Commission, CNBV, in Mexico) or through press releases. With the expansion of the means that companies can use to disclose information, the need arises to assess whether regulation is appropriate.

The way companies disclose information is regulated to ensure that it is made public to all investors at the same time. When information is disclosed only to a segment of the investors, it is considered privileged information that may give an unfair advantage to some investors over others, which decreases the efficiency of the stock market.

In April 2013, the SEC formally accepted social media communications as a suitable method to disclose information. The SEC authorized the use of Facebook, Twitter and other social media to disseminate key information as long as two conditions are met (Holzer and Bensinger, 2013). First, companies must give advance notice to investors as to which social media the business news will be disclosed. Secondly, access cannot be restricted to a particular group.

The SEC decided in favor of the use of social media after an investigation of Netflix, the entertainment and online video rental company (and by mail in some markets). In July 2012, Netflix CEO Reed Hastings revealed on his Facebook page that Netflix’s monthly online viewing had exceeded one billion viewers for the first time. The announcement was made exclusively on Facebook, not through a press release or an official report to the SEC. The post caused a 13% rise in Netflix’s stock price, from 70.45 to 81.72 dollars. The SEC launched an investigation to determine whether messages on social media, in this case Facebook, complied with the rules laid down in the Regulation Fair Disclosure (Regulation FD).

During the investigation, Joseph Grundfest, a former member of the SEC and currently a law professor at Stanford University, recommended that SEC not punish Hastings, arguing that “the announcement by Hastings on his personal page reported in a practical way to more people and more quickly than if he had used the official reports of the SEC” (SEC, 2013).

The main argument of the SEC against Hastings’ posting on Facebook was that it went against the fair disclosure rules because Netflix had not used Facebook to announce important information nor had it informed the investing public that Facebook would be used to disclose company information. Hastings defended himself arguing that such disclosure was not necessary because he had more than 200,000 followers on his personal Facebook page, which made it, in fact, a “very public” forum (Holzer and Bensinger, 2013).

The fact that the SEC recognized that social media channels are “perfectly acceptable methods” for communication with investors has its antecedents in the Fair Disclosure Regulation promulgated on October 23, 2000 (SEC, 2000). The regulation stipulates that companies must disclose business information to all investors at the same time (and not selectively). The objective was to stop the widespread practice of companies offering information in private to analysts, giving them an advantage in the financial markets. Private investors wrote to the SEC expressing their support for regulation; however, large institutional investors, accustomed to receiving material benefit of privileged information, opposed it.

The authorization of the SEC for companies to use social media to communicate with investors reflects the current trend of using these means. Today, companies and employees use Facebook and Twitter to disseminate a wide variety of information.

A study conducted in 2012 by the Conference Board and Stanford University showed that 14.4% of the companies included in the report communicated with their shareholders by social media (SEC, 2000). It also found that more than 75% of the companies used social media to interact with customers.

Large companies such as Dell Inc. and Pepsico Inc. use Twitter to announce financial information and other key information to investors. In February 2013, Pepsico Inc. sent messages from their official Twitter account with financial data from earnings, dividend payments and comments by its director with links to the original documents.

Another example of the impact of social media communication in the behavior of investors is the automobile company Tesla. The shares of the company rose significantly when its director Elon Musk tweeted on May 22: “Today Tesla met the funds to pay back the loan of DOE. It is the only automaker in the United States to have paid the government in full” (Musk, 2013).

In the previous examples, the companies legitimately informed investors through social media. The information was disseminated quickly and efficiently. However, social media can also have a negative impact on the markets when used illegitimately.

On April 23, 2013, the Twitter account of the U.S. news agency Associated Press was hacked. The hackers falsely tweeted that there had been two explosions at the White House and that U.S. President Barack Obama was wounded: “Alert: Two explosions in the White House and Barack Obama is hurt.” Within seconds, this fake announcement made the Dow Jones index on Wall Street fall dramatically (El Nacional, 2013). Although the market stabilized quickly after the White House denied the news, this example shows that the rapid spread of information through social media can also have a negative impact.

The SEC formally recognized a reality, although it is not known exactly how the acceptance of social media in the efficiency of securities markets will be influenced. However, the lessons for investors are clear: They should use with caution the publications of social media to make investment decisions, because they could be manipulated, and they should try to find more information by other means.

Lessons for companies imply novelties. Given that social media outlets are increasingly being used to communicate with investors, companies are faced with the challenge of creating a policy of responsible use of these media. Practices and company politics must be designed to minimize possible negative or unforeseen consequences and maximize the benefits that the speed of dissemination of information provides.