Oops, I Did It Again

Old Britney Spears songs are not normally a source of inspiration for me, but this one feels especially apropos right now.  You see, after being chastised by the SEC for certain tweets last year, Tesla’s CEO Elon Musk is  – oops, doing it again:

Musk Tweet 2.19.2019 - 1

This tweet was about material information for Tesla – annual vehicle production, a figure for which it provides guidance.  The tweet implied guidance different from that provided just a few weeks earlier in fourth quarter 2018 earnings, when Tesla said it was “targeting annualized Model 3 output in excess of 500,000 units sometime between Q4 of 2019 and Q2 of 2020.”  Well, somebody must have said something to Musk, because a few hours later he corrected himself, tweeting:

Musk Tweets 2.19.2019 - 2

This situation is problematic from at least two perspectives:

First, while Twitter can be a useful communication tool, as discussed in a previous post (Loose Lips Sink Ships, August 15, 2018), one tweet on a material topic can rarely, if ever, contain enough information or context for a reasonable investor to make an informed investment decision.  That’s why it’s considered a best practice to issue a press release and/or file an 8-K and refer to or link to that more fulsome source when tweeting on a material topic.

Second, and more specific to Tesla, it points to the need to have a process to vet communications about a company to determine a statement’s accuracy and/or completeness, its materiality and any relevant SEC disclosure requirements.  Setting up such a process is exactly what Tesla agreed to as part of the company’s settlement of securities fraud charges with the SEC last fall, and Tesla’s Board was tasked with overseeing its implementation.

This incident makes me wonder “how’s that working out?”  I guess the news that Tesla’s general counsel – the person who helped negotiate this SEC settlement – is leaving the company after just two months, partly answers that question.

It seems when it comes to Musk and Twitter, Britney’s line from this song: “… to lose all my senses that is just so typically me” appears all too true.

Lisa Ciota
President/Founder
Lead-IR Advisors, Inc.

Taking Stock

It always happens at the end of the year – people take stock of the past 12 months and measure what was most important, popular, read or viewed.  Not to miss out, below is Lead-IR’s top 5 blog posts of 2018.

Lead-IR Advisors
Top 5 Most Viewed Blog Posts of 2018

  1. Ahead of the Curve, April 18, 2018
  2. Replay: New Kid in Town, September 26, 2018 (Original post: February 21, 2018)
  3. Face North, October 31, 2018
  4. Long Days, Short Stint, October 10, 2018
  5. Its Personal, Redux, August 1, 2018 (Original post: January 5, 2018)

In reviewing this year’s top posts, three key themes emerged:

Beyond Business Issues
Should CEO’s and companies address public policy, political or social issues? If so, when and how?  In the past, such topics were considered beyond the normal scope of business and companies and CEOs could stay out of the fray.  However, the general public and investors increasingly believe it appropriate for companies take a stand on issues relevant to fostering a healthy business environment. Both the Ahead of the Curve and Face North posts offered perspectives and best practice pointers on doing just that.  The former outlined how Jamie Dimon, Chairman & CEO of JPMorgan Chase discussed public policy issues in his annual letter to shareholders.  The latter highlighted the importance of having a deep understanding of company purpose, values and culture to guide decisions on where when and how to take a stand.  While not in this year’s top 5, the Stay or Go post from early May 2018 also addressed this topic.

C-Suite Transitions
From the sudden passing of Fiat Chrysler’s CEO Sergio Macchione, to Pepsico’s CEO Indra Nooyi’s retirement and the surprise ousting of GE’s former CEO John Flannery, CEO transitions were a hot topic in 2018. So, it’s no wonder readers found It’s Personal, Redux’s discussion of key disclosure considerations related to CEO health matters and Replay: New Kid in Town’s pointers on introducing a new CEO to investors, particularly relevant.  If you’re working with a new CEO, I suggest reading October 2018’s Just Being post and reflecting on what “becoming” a CEO means in the full sense of the word.

Focusing on Tomorrow
Or rather, there’s not enough of it – focusing on the long term, that is.  Everyone and their brother complain about the short-termism prevalent in the markets today.  Yet, as discussed in the Long Days, Short Stint blog post, it seems every solution to counter this is focused on what companies should or shouldn’t do.  Certainly companies can do some things to counter this as suggested in the Give No Quarter post.  But, as outlined in the Easter Bunny blog post, the current market structure is designed to support investors who drive a big chunk of trading today and have short-term investing horizons.

Lisa Ciota
President/Founder
Lead-IR Advisors, Inc.

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Loose Lips, Part II

Sometimes, I just don’t get it.  I’ve gone through compliance training multiple times; so have friends and colleagues.  It’s ubiquitous at public companies and is designed to educate employees, officers and the board about the company’s code of conduct, which, of course, everyone should also read.

Corporate codes of conduct encompass the legal guidelines and standards of ethical behavior expected of employees, officers and the board, and covers topics like workplace discrimination and harassment; corrupt practices; conflicts of interest; protecting confidential information and insider trading.

So, I was flabbergasted on the news that New York Congressman Chris Collins was indicted on insider trading charges.  This has absolutely nothing to do with politics, but everything do with a breach of his fiduciary responsibility to the company, his fellow directors and the company’s shareholders.

Congressman Collins sits on the board of Innate Immunotherapeutics.  This company’s code of conduct outlines its expectations about disclosure and use of information as well as insider trading. Regarding disclosure and use of information, Innate’s code of conduct states confidential information should not be used in a way which creates a personal benefit or benefits another party not entitled to make use of such information.  It further states confidential information should be kept confidential, and to ask if there is any doubt about what information is considered confidential.

Regarding insider trading, Innate’s code of conduct reminds that it’s a criminal offence to trade company shares while in possession of inside information, which is defined as information not yet publicly available but is expected to have a material effect on the company’s stock price.  The code of conduct then says this trading prohibition applies not only to employees, officers and directors but anyone else – including family and friends – who is given access to inside information.

This is pretty standard stuff.  It places no undue burden on, nor has unrealistic expectations of directors, officers or employees.  Further, the expectations outlined helps ensures those who follow it do not violate Rule 10b-5 of the SEC Act of 1934, which prohibits insider trading.

Yet, the Congressman’s loose lips tipped his son about a failed clinical drug trial before the news became public.  While the Congressman did not trade on this information, his son did and tipped his fiancé’s family, who also traded on the information.  As a director, he should have known better and should not have put his own family in such a position.

Some say insider trading is a victimless crime. That trading is essentially an exchange of information, so the very act of buying or selling is putting information (regardless of source) into the market, enhancing market efficiency.  When all trades are accompanied by a simultaneous news flash of who is trading and why, then I can accept that argument.

Insider trading is a breach of a director’s fiduciary responsibility to shareholders to keep confidential information confidential.  It’s a violation of the law, a company’s code of conduct and the trust of the company’s officers, employees and other directors.  In my view, it’s also crime against trust and the sense of fair play I believe necessary for the effective functioning of the financial markets.

Lisa Ciota
President/Founder
Lead-IR Advisors, Inc.

Join NIRI-Chicago at its annual Investor Relations Workshop – September 28, 2018Print

Sources:
Frenkel, J. (2018, August 8). Insider Trading Charges Against Rep. Collins Reminiscent Of Martha Stewart Conviction. Forbes.
Frenkel, J. (2018, August 13). Collins’ Protestations of Innocence Defy Meritorious Insider Trading Laws. Forbes.

Loose Lips Sink Ships

It’s strange times indeed when SEC disclosure rules and Regulation Fair Disclosure (FD) near the top of the news cycle. It seems the markets, media and regulators are all a-twitter over Tesla’s (NASDAQ: TSLA) CEO Elon Musk’s Twitter:

Musk Tweet 8.7.2018

Musk is known to be something of provocateur and iconoclast in his communications.  The world of Twitter – and social media in general – is often chaotic.  Messages, regardless of their veracity, get whipsawed around like dust in a tornado.  So, what’s the big deal?

Well, Tesla is a public company with publicly traded stock.  For the appropriate valuation of companies and fair operation of the capital markets, there needs to be a degree of trust that when companies disclose material information they do so broadly (so interested parties can readily find the information) and such disclosures not be intentionally misleading or omit material facts that make the disclosure misleading.  These expectations are so important the SEC codified them in the Acts of 1934 and Reg FD.

When it comes to disclosure, what is considered material?  The courts have defined information as being material when:

There is substantial likelihood a reasonable investor would consider the
information important in making an investment decision or view it as
significantly altering the total mix of information available about a company.

Determining materiality is often a judgement call but there are a few bright lines, which include mergers, acquisitions, tender offers and changes in control or management. Musk’s nine-word Twitter message:

  • Was about a material transaction – taking a company private entails a tender offer and could, in effect, result in a change in control; and
  • Neither contained, nor coincided with the disclosure of, additional information explaining the terms, timing and financing of such a transaction.

The timing of such a disclosure is also a judgement call.  Technically, outside of the mandatory 10-Q and 10-K disclosures, there is no duty to disclose so long as the silence is not misleading, does not result in previous disclosures becoming materially false and the company and insiders do not trade on such information.  This allows major negotiations, transactions, research and development activities, etc. to proceed in confidence and secrecy until completion when it does need to be disclosed.

There’s also a question of whether Twitter is an appropriate vehicle for disclosing material information. Given that this Tweet caused substantial market disruption – enough that trading in Tesla’s stock was suspended for 92 minutes – it certainly seems that the news was broadly disseminated.  However, Twitter is not generally where investors (or reportedly Tesla’s board) are accustomed to source their news.

By its very nature, one Tweet on a material topic like this can rarely, if ever, contain enough information for a reasonable investor to make an informed investment decision.  This is a key reason why the Investor Relations world has been slow to adopt social media as a primary means to share news even though the SEC allows for it if a company has previously advised shareholders they may do such (Tesla advised such in 2013).  A best practice would be to issue a press release and/or file an 8-K near simultaneous to posting a Tweet and include in that Tweet a link to the more fulsome source.

Because of this Tweet, the SEC has made some calls to Tesla about this disclosure according to news reports and will likely make some more.  No doubt the media will hound sources to obtain leaks about the terms and financing of any potential transaction.  Speculators who trade on news flow will remain all revved up.

Loose lips – or more precisely, an itchy Twitter finger – may not have sunk this ship, but this is not an ideal scenario if the real goal (as Musk states) was to focus on operations and long-term growth while minimizing short-term volatility and distractions.

Lisa Ciota
President/Founder
Lead-IR Advisors, Inc.

Join NIRI-Chicago at its annual Investor Relations Workshop – September 28, 2018
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It’s Personal

Shortly before the holidays, news of CSX’s CEO passing renewed the debate on CEO health disclosures.  My sympathies go out to his family, friends, associates and the people who looked to him for leadership.

Seeing the news reminded of my own decade-old experience with the passing of my former company’s CEO.  At the time, I was fortunate to work with outstanding leaders who created the best practice for communicating about a CEO’s health and death.

When it comes to the health of a CEO or any person seen as pivotal to company success, there are no specific SEC disclosure requirements. Indeed, there is no duty to disclose so long as that silence is not misleading or does not result in previous disclosures becoming materially false.  However, public companies are required to disclose known risks and uncertainties that may materially affect future results as well as the departure of executive management. A CEO’s inability to perform his/her duties – depending on the duration – can be perceived to fall under these requirements.  Accordingly, there is an underlying assumption that such news will be shared.

Now, the question of what to say, how to say it and when, is difficult no matter the circumstance.  Complicating matters are the very real personal relationships both inside and outside the company that make such communications potentially fraught with emotion.

Recognizing this, it’s useful to have a disclosure framework that considers:

  • the executive’s importance (both real and perceived) to the organization and its strategy;
  • the nature of the circumstances, the impact on the CEO’s ability to perform his/her duties and expected duration;
  • status of contingency or succession plans.

Be sure to seek out input and perspective from the board, senior management, legal and human resources as well as key external advisors as necessary.  Designate key spokesperson(s) and family liaisons.  Think about potential ongoing disclosure needs and the types of information or permissions that may be needed as the situation evolves.

In the end, these are very personal matters.  Issues of the transparency and disclosure expected of a public company need to be balanced with kindness, honor and respect for the individual.

Lisa Ciota
President/Founder
Lead-IR Advisors, Inc.

(Reference: February 2009 Compliance Week article Rules for Disclosing a CEO’s Unexpected Absence by Harvey Pitt, Founder, Kalorama Partners and former SEC Chairman)