Subsequent to Tesla and Elon Musk’s punishment by the SEC for misleading investors with a pledge to take the company private, Musk responded by tweeting out a sarcastic comment which seemed to take a shot at the organization.
In part, Musk’s tweet read:
that the Shortseller Enrichment Commission is doing incredible work. And the name change is so on point!
While the recent settlement, which included a $40 million dollar penalty (split between Musk and Tesla) and Musk being removed as Tesla chairman for three years, was relatively lenient considering Musk’s reckless behavior, it certainly hasn’t left him a changed man. The resulting fallout spurred many discussions regarding the future of social media and CEOs. Indeed, many are left to wonder whether CEOs should even be using social media at all.
Elon Musk vs. the SEC
In order to understand how we got here, it may help to review the SEC’s complaint against Musk. The SEC maintained that Musk deceived investors when he claimed in a tweet that he could take the company private at $420 per share at the time. In later tweets, he added that he had the funding and was only waiting for the approval of stockholders. His continued assertions about taking the company private caused NASDAQ to stop trading for over an hour and prompted the SEC inquiry. The SEC also contended that Musk knew his claims were false and therefore deliberately misled investors, sowing confusing in the market and doing damage to the share price. They continued that Musk’s proposal lacked adequate details, and, more importantly, they found no evidence of Musk discussing this issue with the board or any outside consultants prior to his tweets.
Notwithstanding the obvious damage caused by his tweet storm, the Musk incident also highlighted the confusion surrounding the rules overseeing the content and timing of social media disclosures. Nasdaq, for example, requires ten minutes notice prior to the disclosure of material information that could affect a stock price or investor confidence. Clearly, Musk had no such intentions before his tweet. How many senior level executives, on the other hand, are aware of the business laws governing social media usage?
The resulting penalties and reforms could signal a sea change in the relationship between material company disclosures and social media.
In addition to the above-mentioned penalties, the SEC also mandated new internal company controls. These included adding two new independent directors to its board and formulating a committee of independent directors in charge of supervising communications from executive personnel.
While these reforms are designed to protect investors from further harm and to insure greater oversight into executive communications, they may be more significant for what they failed to address. In its ruling, the SEC did not charge Musk with violating Regulation Fair Disclosure (FD), which mandates that a company disclose material information to all investors at the same time. In other words, the SEC appeared to accept Tesla and Musk’s contention that Twitter is a legitimate and known method of distribution of Tesla company material.
The SEC, however, also maintained that Tesla had neither the right controls installed to insure the accuracy of the information on Musk’s Twitter account nor did anyone else at Tesla properly vet the information in question.
What Does SEC Really Stand For?
The problem with Musk’s later tweet taunting the SEC as the Shortseller Enrichment Commission is that it highlighted how stock performance can be affected by factors other than business disclosures. In this instance, company stock dropped over 7% after the tweet. Apparently, Musk’s tweet worried investors about his mental state and his ability to continue to lead the company responsibly.
The Future for Social Networks and Senior Executives
Clearly, companies will have to adopt much more stringent policies regarding senior executive use of social media.
When high-profile executives interact carelessly with social media, the resulting confusion can cause not only long-term damage, but it may also incur serious legal ramifications. Moreover, they will also need to consult legal experts in order to remain in compliance with current regulations. Business attorneys, in turn, will have to balance the calls for greater transparency with the apparent pitfalls within social media.
Should the CEO really be tweeting?
The larger question, however, revolves around to what degree companies want their senior executives involved in social media. Is an executive’s freedom to use social media to spread information really worth the inherent risks involved? If non-business related tweets or Facebook posts can do significant damage to stock prices, do companies really need to allow executive use of social networks beyond the official, more easily-monitored company accounts? As social media grows in importance, companies will need to decide at the outset whether they are willing to accept the risks and potential legal issues that may arise with senior level social media activity. As Elon Musk and Tesla found out recently, social media and sensitive company information can make for a potent, if not outright lethal, cocktail.