Facebook Isn't Public Enough

Comment | Print | RSS

• Login to Rate

Here's the issue: When the official of a public company makes a financial statement that indicates something important about the company's market, condition, or performance, it should be said in a forum (and a form) that's accessible to pretty much anyone who's interested in the company. In the past, that's been defined as "the press," meaning standard newspapers and television stations, or in carefully prepared forms and statements in a format approved by the SEC. A few months ago, though, the CEO of Netflix stretched the definition of "public," and the SEC is only now moving toward creating a rule about it.

Back in July, Reed Hastings, the CEO of Netflix, posted on his Facebook page that the company had exceeded one billion hours of viewing in June, and would probably break that record in coming months. Not surprisingly, the share price of Netflix went up after the announcement, and the SEC decided to take a look at what Hastings said -- and where he said it.

Hastings had, at the time of the post, about 200,000 fans of his page. As of this writing, he's up to around 245,000. The narrow question for the SEC would be whether 200,000 potential viewers makes the statement "public." The broader question is whether any social network, whether Facebook, Twitter, or something yet to be developed, could rise to the standard of a vehicle for public disclosure. The initial indication, based on a notice Netflix says it's received, is that Hastings committed a disclosure violation. It's likely the SEC is going to maintain the point of view that Facebook pages aren't public for the purpose of the law, and that more traditional means must be used for disclosure. That rule would have some interesting consequences for CIOs of publicly-traded companies because it strikes at the heart of financial disclosure rules.

One of the joys of social networks (especially Twitter) is that they give at least the illusion of unfiltered access to the thoughts of celebrities and business leaders. That's fine, and there are some subjects ("Why I prefer marmalade to jam on my morning toast") that are fair game for corporate offices in a rough-and-ready context. If those officers are going to spout off about anything related to the company's financial condition or possibilities, though -- or, for that matter, on any subject at all that could reasonably have an impact on the company's stock price -- then the spouting off needs to be run through the traditional financial disclosure channels.

This is not a problem that lends itself to a technological solution. Filters are nice, but short of a firewall that simply blocks all access to Facebook and Twitter (and good luck on installing such a thing on your CEO's private tablet), you're going to have to depend on carefully constructed rules that are communicated fully, well, and often to anyone who might be affected by them. It is, in short, a human knowledge and relations problem, not a technology problem. Because the process involves computers, though, it's your problem.

There are few areas of technology or commerce in which rules actually run ahead of technology. In most cases, they lag behind and are only brought into clear focus when someone does something that, in retrospect, is seen to have been a violation. This is such a case, and it's not likely to be the last. CIOs in public companies should get in front of this by working with marketing and legal to establish clear, conservative rules. Things can always be slightly loosened if the SEC changes its mind, but I don't think any of you are so bored that you want to volunteer to be part of the next precedent-setting court case.