A little paranoia …

A little paranoia is a good thing. For companies, paranoia can be helpful – if it means aggressively keeping confidential information, well, confidential.

The growing scandal over illegal trading on inside information (browse the latest SEC cases here) tells us two things:

  1. People are out to get us at least, a few people are out to get our material nonpublic information and rob the market by taking illicit advantage of that info.
  2. Leaks are damaging – to the companies named in investigations, cheated shareholders, busted “tippers” and traders, and everyone’s confidence in the markets.

As guardians of the company’s reputation, investor relations professionals ought to be advocates for vigilance. Working with Legal, we should be on this case  – paranoid about information flow and zealous about preventive practices.

Not that any level of protection can completely guard against deliberate corruption of individuals like that alleged in the Galleon Group and other recent cases. It’s like any other kind of stealing: Doors, locks and alarms only protect us to a point. But we do have doors, locks and alarms. Our information flow should, too.

I’ve been watching the news stories for the roles of corporate and agency IR people – for better or worse. One IR consultant was tagged early on as an alleged leaker, and one company apparently used surveillance to catch an employee sending out secrets on a fax machine. Executives, lawyers, hangers-on and traders have been charged so far. At some point as the scandal continues to unfold, we may get a broad look at the role of security measures (or lack of them) in these leaks.

Meanwhile, well-known corporations whose M&A deals or earnings allegedly were leaked to the scoundrels continue to be in the press. When an employee or outside person hired by a company is charged in a criminal prosecution, make no mistake, it does damage the company’s reputation. The only good solution is prevention.

So what can IR do to protect against leaks and improper trading? A few ideas:

  • Beware of the investor who habitually pushes for an “edge.” Everyone is looking for unique insights, and they may think their mosaic is such an edge. But some callers barrage you with more demanding questions – probing beyond what they know a company should provide. Stand on good disclosure practices – provide the right info, nothing more. Warn executives about pushy individuals. If a caller fails with IR and starts calling other people in the company, set him straight or cut him off. Legitimate investors play by the rules.
  • Be sure everyone in management, including admin assistants, understands that they must know who they’re talking to before answering any question – and all investor calls should be transferred to IR. It’s wrong for a plant manager or R&D scientist to talk to an investor outside the approved IR process.
  • Don’t discuss confidential information with colleagues in a coffee shop, on a plane or over your cell phone in a crowded place. Find a private place.
  • Have a clear policy for all employees’ treatment of confidential information – financial, competitive, or related to the privacy of customers or colleagues. Single out the criminal nature of trading on material nonpublic information.
  • Train new employees (and outside contractors) in that corporate conduct policy, and remind everyone of its key points at least once a year. Consider using the current scandal as an intro to a company-wide email or memo on this topic.
  • Give ongoing counsel to people involved in the earnings process or run-up to any kind of M&A. I’ve been asked to sign in blood on special nondisclosure agreements when helping on some deals – and that’s a good thing. You’re not accusing anyone of bad intentions, just cautioning against inadvertent slips.
  • Try not to feed office gossip. I don’t know if code names for deals or secret off-site meetings really hinder the grapevine – people in Sales will always speculate on whose limo is parked at the front door – but we should make an earnest effort to keep a “door” or “lock” on confidential information.
  • Monitor social media for the company’s name and key brands. Marketing or PR already may be monitoring to measure visibility and customer sentiment; get into the loop. Business data or speculation from employees shouldn’t be showing up on Twitter, FaceBook or good old Yahoo. Chase down anything that appears to be a leak, and enforce the confidentiality policy.
  • Watch the market for unusual trading before an event like earnings or a deal. Bring Legal into the discussion if you have suspicions of improper trading. That would become a complicated legal issue very fast, but the initial alarm could come from your daily observation of the market for your stock.

I like a suggestion from a lawyer that appeared in The New York Times (“Executives Are Wary After Arrests”) a few weeks ago. The story said “switchboards are lighting up” at law firms as tech executives and hedge fund managers ask advice on where the legal lines are drawn. One piece of free advice seems especially pertinent:

Nathan J. Muyskens, a government enforcement lawyer at Shook, Hardy & Bacon, said that clients had been asking him if they should send companywide e-mail messages reminding people not to say anything questionable, even a joke, on the phone. He said he told them they should.

“I’ve heard that there have certainly been memos going out: ‘Think of the phone just as you think of your e-mail these days,’ ” he said. “We always say, ‘Think of that e-mail as being on the front page of The New York Times before you hit the send button,’ and now it’s exactly the same for the phone.”

As I said in an earlier post (“Loose lips sink … IR”), it’s usually a bright line for IR between public information and nonpublic. The alleged leaks at the heart of the Galleon cases have to do with things like companies planning to be acquired or missing their earnings estimates – no brainers in the area of confidentiality.

Everyone loses when people on any side of the capital markets betray the shareholders’ trust for private gain. If you don’t think these insider trading stories are ugly, wait ’til we see the regulatory or legislative reactions in 2010. Congress is on a tear to “do something” in response to scandals – and the “fix” isn’t likely to improve the climate for open and legitimate communication with our investors.

© 2010 Johnson Strategic Communications Inc.

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