Wednesday, December 7, 2011

Crisis Investor Relations in the Age of Social Media

So often lately, public companies have been under attack. Most of these attacks have been directed at Chinese companies publicly-traded on US stock exchanges.

When these attacks started they were largely ignored. No one was surprised that a handful of small-cap Chinese companies were frauds.

But when the attacks exposed some mid-cap companies that were core holdings of institutional investors and had been taken public by US bulge bracket investment banks, people started to pay attention. And now, whenever equity research reports or financial blog posts are published claiming fraud, public companies and their investor relations teams are forced to respond in an effort to stem what can be steep share price declines.

So how are public companies responding to accusations of fraud?

The most common practice has been to simply issue a press release addressing the allegations. This is what New Oriental Education (EDU) did. So did China Medical Technologies (CMED).

But Focus Media (FMCN) took it up a notch. Faced with a comprehensive report from research outfit Muddy Waters, Focus Media issued not one but two press releases rebutting the accusations. They also conducted a lengthy conference call open to the public, announced certain recommendations to their audit committee, and confirmed their intention to continue purchasing shares under an existing stock buyback plan. On a personal level, Focus Media’s CEO sat for an interview with the China Business News, took to his Sina Weibo account (China’s Twitter equivalent) to denounce the research report, and purchased a significant amount of stock in a block trade. Since then the stock has largely recovered.

While these recent research reports have focused on Chinese companies traded on US exchanges, there’s little doubt that non-Chinese companies will be targeted at some point, too. As a result, public companies of all sizes must be prepared especially in this era of social media where information travels fast. Companies have little choice but to take online equity research seriously and be prepared with a game-plan for how to respond. To date, Focus Media appears to be the best example of what to do when under attack.

But there’s a larger point to be made here. Despite the growth of social media over the last many years, public companies still have few options in which to respond to accusations or even initiate discussions with investors online. At present, Twitter and StockTwits remain the best platforms companies have to respond quickly and effectively. One can imagine that StockTwits will become an even more important platform for public companies and their investor relations teams once they announce a much-rumored Yahoo! Finance collaboration that will allow companies to speak directly to investors on the most trafficked finance website.

But what about online platforms frequented by long-term investors? Wouldn’t those be better platforms for public companies looking to target investors with a specific message especially in times of crisis? As we know, long-term investors are what public companies most desire.

Over the years (since departing my IR product development role at SeekingAlpha and now as a portfolio manager), the most promising platform I’ve seen for public companies looking to engage long-term investors online has been Motley Fool. They've held some incredibly substantive community-driven Q&As with public company executives. Unfortunately, their efforts seem to have been abandoned.

My gut tells me StockTwits will be the big winner in the near term. They've been aggressively courting investor relations professionals who’ve been waiting patiently for years for a great social media platform to reach investors. Just look at the number of companies that have signed up for StockTwitsIR in such a short time. It clearly shows the pent-up demand I’ve been discussing for many years.

But that still leaves a void for public companies seeking a platform to reach long-term investors online. If such a platform existed today companies like Focus Media would have another place to reach current shareholders, engage them, and communicate their side of the story to counter the allegations against them. And once the current crisis subsided, Focus Media would have a platform to pitch their story to new investors – something they can’t do on conference calls, through press releases or via their website.

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