Over on the IR Web Report’s Investor Relations Blog, Dominic Jones offers a thought-provoking commentary on market rumors and how companies should respond to them (“IROs, not regulators should quash rumors”) – in answer to an Andrew Ross Sorkin column in The New York Times.
The Times columnist delves into rumors that helped drive Lehman Brothers’ stock down 11 percent one day last week – and then looks for someone in government who will do something, a variation of the widespread there-oughta-be-a-law philosophy:
There’s no way to quantify whether rumors are more rampant today than they used to be or whether they are just traveling faster. But what is clear is that there seems to be little being done about it. It might be difficult to make a case, but you’d think you’d see subpoenas flying at least as fast as the rumor mill. (“Psst! Hear the Rumor of the Day?” The New York Times, July 8, 2008.)
Jones takes a more free-market approach, calling on the market for a freer exchange of information. Companies and their IR people, he says, should communicate proactively, respond to false reports in something like real time, and stop whining about unethical short sellers who may or may not be spreading phony information.
“A big part of the problem is that companies aren’t effective at countering rumors,” Jones says. Especially noteworthy is his observation that most companies do not respond online to rapidly changing market information. In a world of ultra-short term trading, rumormongers employing e-mail and IMs can easily outmaneuver companies mired in a do-we-issue-a-press-release debate among their executive and legal teams. And shareholders can be the losers.
Jones argues that companies need up-to-date online communication practices more than rigid “no comment” policies. As I said, it’s thought-provoking; not sure there is a universal answer to this one. I have seen companies respond to rumors with timely news releases or public statements – and quell the sell-offs. I have also seen managements keep their own counsel, on the theory that the truth prevails and stock prices even out in the long run. I’ve also seen some pretty ugly outcomes.
The National Investor Relations Institute manual, Standards of Practice for Investor Relations, notes that stock exchanges generally require companies to respond to market rumors if there’s a likely material impact on the stock price – that’s a conversation that should take place. But NIRI goes on to talk about the merits of consistency in sticking to a statement like “It is our policy not to respond to market rumors.” The Standards were last updated in 2004, and change is afoot in online IR in 2008.
With more companies starting to embrace online interaction with investors, and the Securities and Exchange Commission warming up to management forays into Web 2.0 for investor communication, the issue of real-time answers to significant questions will be heating up. I agree with Jones that the best responses to rumormongers are likely to come from the marketplace, not from Washington.