The growing importance of online sentiment to stock markets

The notion that online sentiment is a critical risk factor, especially in the context of stock markets and share trades, is gaining momentum. Australian Dionne Lew, the CEO of The Social Executive, wrote an article for Leading Company titled “Social media: Love it or loathe it, the ASX says you can no longer ignore it” in which she highlights the increasing impact online sentiment in services like Twitter and blogs (still relevant and important after all these years) has on companies’ bottom lines, particularly in the context of stock exchanges. This trend is so important that the Australian Stock Exchange has updated its disclosures Guidance Note for companies listed on the ASX:

Working closely with the Australian Securities and Investment Commission, the ASX recently updated its guidance on disclosure), advising companies to monitor online for sensitive information to ensure that the market trades fully informed. Further, company secretaries must consider its impacts with respect to risk.

The updated Guidance Note specifically caters for social media and recommends that companies monitor the social Web for mentions and sentiment that could have an impact on their activities. For example, on the topic of a trading halt, the Guidance Note contains the following advice at page 17 (emphasis added):

ASX would strongly encourage an entity which is unsure about whether it should be requesting a trading halt or voluntary suspension to cover the period required to prepare an announcement, to contact its listings adviser at ASX to discuss the situation.

If the entity decides not to request a trading halt or voluntary suspension to prevent the market trading ahead of an announcement, ASX would also strongly encourage the entity to monitor:

  • the market price of its securities;
  • major national and local newspapers;
  • if it has access to them, major news wire services such as Reuters and Bloomberg;
  • any investor blogs, chat-sites or other social media it is aware of that regularly post comments about the entity; and
  • enquiries from analysts or journalists,

for signs that the information to be covered in the announcement may have leaked and, if it detects any such signs, to contact ASX immediately to discuss whether it is appropriate to request a trading halt.

A footnote (footnote 63) on the social media reference item points out the following:

For example, the “shareholder action” blogs that exist for some listed entities. A listed entity which is the subject of such a blog would often be aware of that fact from communications with its shareholders and, in ASX’s experience, would generally be monitoring the blog for an insight into what its shareholders are saying about it. Some (generally larger) listed entities would also be monitoring certain investor blogs, chat-sites and other social media sites through their investor relations function, again for the purposes of understanding what is being said about them on those sites. Where a market sensitive announcement is pending, ASX considers that the entity should also be
monitoring these sites for signs that the information in the pending announcement may have leaked.

Another example of where the Guidance Note caters for social media is in the context of information leaks before information is submitted to the ASX on page 27 of the Guidance Note:

4.17 What if information is released to someone else before it is given to ASX?

If a listed entity becomes aware that market sensitive information which has not been given to ASX under Listing Rule 3.1 has been released to a section of the market (eg, at an investor or analyst briefing or at a meeting of security holders) or to a section of the public (eg, at a media briefing or through its publication on a website or in
social media), the entity should immediately give the information to ASX under Listing Rule 3.1 in a form suitable for release to the market.

Lew makes an important point we have made previously, namely that companies have to recognise that online sentiment must be addressed as part of a broader corporate risk management strategy and not simply relegated to a marketing department:

It’s a lay down misère that companies must be where their customers are and there is increasing awareness that peer-to-peer recommendations on these platforms carry weight.

As a result, the concessions we’ve seen around social media use have been largely in the marketing and sales space.

But this approach fails to recognise that the impacts of a channel that is ubiquitous cannot be managed in or by silos, but must be wholly integrated into corporate strategy, including governance and risk.

Online information is unbounded; the speed at which it travels leads to direct market impacts (the executive and board domain).

More and more companies have experienced sharp share price drops after rumours spread across the social Web and frequently far faster than they can respond meaningfully to the sentiment. These companies find themselves doing more damage control than prevention and the growing use of automated and semi-intelligence systems to process trades will only aggravate the situation further.

An Australian example Lew cites involves Whitehaven Coal:

For example, in January this year, the share price of Whitehaven Coal dropped 6% after a fake press release lit up the online networks.

The release claimed to be from ANZ overturning a recent loan to Whitehaven that would have had a significant impact on its Maules Creek project.

Both Whitehaven and ANZ later confirmed the hoax, but not before $314 million was wiped off the share price and the company was placed in a trading halt.

What does this mean from a risk and governance perspective in South Africa? Much the same as it does elsewhere: boards should be paying attention to what is being said about their companies online. It appears that one of the reasons this isn’t happening is that directors are unfamiliar with the proliferation of social sharing services and may even tend to perceive them as being more the domain of younger generations sharing animated cat images than as having a meaningful impact in the business world. This is risky thinking and is increasingly and demonstrably inaccurate.

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Reputation Management expert, Deon Binnerman, recently pointed to a post on ReputationXchange titled “Lessons from politics for reputation-observers” which highlights the risks of not paying attention to stakeholders:

Stakeholders have a much clearer stake in the brands and reputations of the companies they support and are now the first to object to corporate misbehavior, unfairness or lack of transparency. And they can assert themselves whenever they want now, regardless of news cycle. Reputations are increasingly being torpedoed because consumers want their say in how companies behave and what they do. When that wish is not granted or they are not listened to, companies will regret it and pay the price.

There is a host of indicators that this is as real a concern for South African businesses and the trend is only going to grow. Reputational harm is becoming more severe and bottom line impact is occurring more frequently. Certainly there are events which tarnish a brand’s reputation and are otherwise momentary but as the social Web becomes a dominant communications platform, the risks of more enduring events increase, as does the tangible harm.

Samantha Buchler recently wrote an article for the Jacobson Attorneys blog about the Business Judgment Rule and its benefits for directors facing liability under the South African Companies Act. She points out that Companies Act requires directors to exercise a “degree of care, skill and diligence that may reasonably be expected” of them. One of the factors in determining whether a director has done this is whether the director has “taken reasonably diligent steps to become informed about the matter”. As the impact of online sentiment on a company’s reputation and financial wellbeing is better documented and publicised, directors who fail to take “reasonably diligent” steps to familiarise themselves with online reputational risks could find themselves liable for when risks they could otherwise have anticipated actually occur and harm their companies.

For more on this topic, take a look at a few of the articles we’ve published on this site:

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