The CSA’s social media review: #readitandweep

Among the easier lessons to extract from the Trump presidency (not that any of them were needed, certainly not at such a wretched cost) is the inadequacy of social media, and of Twitter in particular, as a medium for conveying any message more complex than “I like cake”…

I’ve written here several times about my experiences of scrolling through Twitter for IFRS-related content (most recently here), and although in those articles I chose to focus mostly on nonsensical findings, it’s also true that the exercise almost never yields anything useful that wouldn’t have come to one’s attention through multiple other means. The idea that one needs to receive corporate information immediately, or that one can meaningfully do anything with it when that happens, obviously contributes more than a little to the excessive short-termism and generally over-abstract approach to investing that I’ve touched on several times lately (see here and here).

Still, the idea is out there that companies need to be visible on social media, that they’ll suffer if they’re not, and so forth. Of course, that train of thought relates mostly to customer-facing and branding functions, rather than to investor relations. But not entirely. The CSA recently issued CSA Staff Notice 51-348 Staff’s Review of Social Media Used by Reporting Issuers, which summarizes CSA staff’s findings and disclosure expectations for reporting issuers that use social media. Here’s how the accompanying news release summed it up:

  • “Staff reviewed the social media disclosure of 111 reporting issuers to determine if they were consistent with the principles of National Policy 51-201Disclosure Standards and the requirements of National Instrument 51-102 Continuous Disclosure Obligations by providing balanced disclosure and ensuring that information is not selectively disclosed or misleading.
  • ‘Our review revealed concerns about how issuers are using social media websites, including specific instances where deficient social media disclosure may have resulted in material stock price movements and investor harm,’ said Louis Morisset, CSA Chair and President and CEO of the Autorité des marchés financiers. ‘We expect issuers to adhere to high-quality disclosure practices, regardless of the venue of disclosure, and encourage issuers to implement a strong social media governance policy.’
  • The review found that a significant number of issuers, or 77 per cent, had not developed a specific governance policy to direct their disclosure practices on social media websites.
  • As a result of the review, 30 per cent of issuers took action to improve their disclosure, including filing clarifying disclosure on SEDAR, removing social media disclosure and committing to improving disclosure and governance practices.”

In terms of the focus of this blog, the following passage from the report may be of particular interest:

  • “We observed instances where the disclosure provided by issuers on social media was either untrue or promotional to such an extent that it could have misled investors. In several instances, issuers provided commentary or other information about their financial results on social media which did not appear to be consistent with or contained in their continuous disclosure on SEDAR. For example, this occurred when figures being disclosed on social media were non-GAAP financial measures which had not been disclosed in any regulatory filings, or in any other disclosure outside social media. Beyond any selective disclosure issues which may have existed, those investors who had received the non-GAAP financial measure disclosure on social media were not provided with all of the disclosures that issuers should provide when they present non-GAAP financial measures, including a quantitative reconciliation of the non-GAAP financial measure to its most directly comparable GAAP measure. In the absence of these disclosures, investors may be unable to understand the full meaning and significance of the non-GAAP financial measures being disclosed, which can result in their being misled on the basis of incomplete information.”

It is truly mystifying why any company would choose to tweet out an isolated non-GAAP measure that hadn’t been disclosed anywhere else, and for which it provided no further context: it certainly seems that such a company should be sanctioned for something, even if just for pure lunacy. Still, it would be equal lunacy for an investor to scoop this number off his or her iPhone and to use it as a basis for doing anything that could actually prove harmful to him or her. That is, while the company might be culpable of “misleading” investors in the sense of pushing them into short-term confusion or disorientation, it can only amount to more than that if the investors recklessly allow themselves to be misled.

If one thinks instead about (say) possible over-reactions to tweeted announcements about new products or suchlike, then perhaps it’s slightly easier (if no more comforting) to grasp how, to quote from the report again, “in the case of four specific issuers, (an) original non-compliant disclosure and/or the subsequent correction of that disclosure resulted on average in a 26% movement in the stock prices of the issuers involved.” Still, just think for a second about what that’s saying – that all the time and effort spent by an issuer on disclosure and branding might nevertheless still leave its stock price exposed to such massive sudden turbulence! So much for the unquestionable pre-eminence of ‘level 1’ stock prices. “In these cases,” says the report “the deficient disclosure appeared to be material and Staff may consider further engagement with these issuers.” We surely need more detail – through the enforcement process or otherwise  – on such sorry scenarios, both as learning exercises, and as shameful symbols of our collective irrationality.

The opinions expressed are solely those of the author

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