It was not a good day for Shopify – an online commerce company based in Ottawa. On October 4, 2017, its stock price fell more than 10% because of an incendiary short-seller report that came out of nowhere.
In the past, the share price of a public company might have been buffeted by the malicious rumours of short sellers or even just tall tales that take on a life of their own. But in an era of ‘fake news’ fueled by social media, IROs everywhere are finding themselves responding to allegations that may have little or no basis in fact.
“Since the age of social media, news spreads far more rapidly than it ever would have in the past,” says Katie Keita, Shopify’s Head of Investor Relations. She notes that in this case, the short-seller report by Andrew Left at Citron Research was accompanied by a YouTube video accusing the company of running a “get-rich-quick scheme.”
While Canadian IROs may be insulated from the very worst of the barrage of fake news hitting the United States, they are far from immune. According to the Edelman Trust Barometer, 65% of respondents in Canada are worried about the spread of fake news.
David Ryan, Senior Vice President and National Practice Lead, Financial Communications, for Edelman, says: “Fake news is perhaps not as much of an issue in Canada as it is in the U.S. but it’s still an issue. It’s something IROs need to be cognizant of because companies with weak investor relations programs are particularly susceptible to the spread of misinformation.”
To Respond or Not To Respond?
“Social media provides a platform at essentially no cost for someone to put a message out,” explains Matthew Merkley, Partner at Blake, Cassels & Graydon LLP in Toronto. “Today, anyone with a social media account can express whatever complaints they might have written in a letter or phoned into a complaint line and it can go viral.”
For Keita, one of the biggest challenges last October was talking to investors before the company had formulated an official response. “The most important thing an investor relations officer can do is to not make themselves unavailable,” says Keita. She recalls the challenge of feeling like she must be in two places at once: helping management and the disclosure team craft a response while sticking close to the phone to field calls from investors.
Immediately after the report hit, Keita reminded investors that Citron’s “business model is to generate bearish calls on a stock. I was not commenting on [Left’s] charges and I was not responding to him without the benefit of the response formulated by Shopify. But I was reminding investors of the big picture.”
She also relied on previous comments to explain Shopify’s business model, which Citron had called into question. “Reminding people of things you’ve already said in your filings is a helpful tactic,” she says.
Ultimately, while Shopify’s CEO did issue two tweets in response to the short-seller report, Keita notes that the responses came only after careful consideration. Shopify CEO Tobi Lutke tweeted that the irony of an outfit like Citron accusing any business of being a get-rich-quick scheme should not be lost on anyone. He also tweeted that he was looking forward to the next earnings call to address questions. Keita says that while she puts stock in the conventional wisdom about avoiding Twitter wars, she is convinced that her CEO’s tweets calmed investor fears.
Andrea Schneider, Associate at McCarthy Tetrault LLP in Toronto, explains the challenge an IRO faces this way: “Because you have to be ready to stop fake news quickly, companies are forced to be more creative in their communications methods. You want information to reach investors quickly – and in a way that maximizes reach.”
Schneider also observes that the lag time for responding has shortened. “There is an expectation for a quicker response given the Internet Information Age that we’re living in,” she says, “but I’d add a caution and advise that companies don’t respond too hastily.”
When it comes to social media, Edelman’s Ryan cites Twitter as “a particularly challenging platform” and “the pointy edge of the spear in the transmission of information through the investment community.”
Part of Twitter’s danger lies in what makes it so popular: its radical brevity. “It’s tough in 140 characters to deliver a corporate strategy and value proposition,” says Ryan. What’s more, he notes that retail investors, who typically rely heavily on Twitter, “are disproportionately affected by misinformation in the marketplace. Institutions have their own resources and research and are able to make more sophisticated decisions. But a retail audience is more susceptible to seeing an erroneous article and making an uninformed decision.”
For this reason, IROs need to have “a set of very sharp, clear messages that they can deliver to a retail audience to help bring them along and understand a company’s strategy and value proposition,” says Ryan. He continues: ”Whether or not you can parse that into 140 characters isn’t the point. You can use Twitter to drive traffic to web sites and other documents so that investors on the retail side know where to go to get informed.”
Finally, the current disclosure regimen in Canada may be posing problems of its own. According to Edelman, 58% of those surveyed in the firm’s latest institutional trust survey feel that current disclosure requirements are not doing enough to maintain trust.
Merkley points out that Canadian securities laws “look a bit dated” because they do not allow material information to be disseminated via web sites, let alone social media. He notes that in 2013, when Netflix CEO Reed Hastings was roundly criticized for posting what might be considered material information on his Facebook wall, U.S. regulators issued a statement saying that disclosing material, non-public information over official corporate social media accounts was permissible – so long as the company had previously explained that these channels might be used for such disclosures.
Reputation Matters
Shopify has plenty of company when it comes to short-selling woes. According to London-based Activist Insight, there were 21 Canadian short-selling campaigns in 2017 with 16 firms targeted – more than a threefold increase from the six single campaigns in 2013.
And in a now infamous snafu in 2017, San Francisco-based short seller Muddy Waters indicated that it was about to release a short report on a Canadian company. Element Fleet Management promptly lost roughly 40% of its value on social media speculation – before Muddy Waters’ target was revealed to be Vancouver-based Asanko Gold. According to an October 6, 2017, article in the Financial Post, Asanko subsequently saw its share price halved.
Keita offers practical advice for IROs to consider when finding themselves in her shoes. It’s critical, she says, to refer investors to previous communications. What’s more, Keita was pleased that Shopify’s CEO already had a Twitter feed because it gave Lutke an avenue to communicate. “A response on social media doesn’t work for a company that doesn’t have a social media presence,” she cautions.
Ryan also recommends that IROs develop a Twitter following. “You ignore social at your peril,” he says.
Merkley sees the strides issuers have made in strengthening their MD&A disclosures as a hopeful sign. “It makes sense to really try to bolster in the minds of investors what the company is doing and the robustness of the strategy.” He continues: “Improvement in the MD&A is a forward-looking way to provide a platform for understanding the business in case a short seller attacks the business model or strategy.”
In the end, a strong communications strategy can carry the day. Janet Craig, founding partner of Endeavour IR in Toronto and former IRO at Fortis, Loblaw, Nexen and Nortel Networks, says: “If your strategy has been well articulated, you’re not just giving an open space for someone else to fill.”
What the Future Will Bring
Ryan notes that while fake news and social media-driven rumours can make an IRO’s life more difficult, they also underscore the importance of a strong investor relations program.
“Investors are telling us they want a deeper dive into the story – and a good IRO will do that,” says Ryan. “IROs can really demonstrate the value they bring to the business.”
Craig agrees, noting that “IROs have the tools at their fingertips to respond rapidly.” Not only have IROs honed their crisis management skills by commenting on headline information, but they now increasingly enjoy the corporate and Board support necessary to respond effectively, says Craig. She notes that scrambling to address information quickly is a new demand placed on IROs, but it’s a demand they are well prepared to meet given the increased “experience and sophistication of the profession.
“The way the world has evolved and adapted makes it easier for IROs to address [fake news and lightning fast news cycles],” concludes Craig. “Things have changed, but we have changed, too.”