Facing Down A Short Selling Attack - Part Two
05 April 2016
With our research showing that companies who have built reputational resilience likely to be more highly valued by the investment community, developing this capability when faced with a short attack is not the optimum approach.
If your company is targeted, the first reaction is often an aggressive counter attack. This may be the right course of action, but first Board’s must step back, view things objectively and use a considered approach. As this article will now set out, there are a number of tactical steps required to defeat a short attack; which should be considered alongside and in support of a wider legal strategy (to be covered in Part 3 of this series).
To re-cap; reputation and share price move extremely quickly, and, with the need for a considered response noted, so must the Board. Where an attack is malicious, false or misleading, the following steps are effective in helping Boards to protect shareholder value:
Assess motive and credibility
Assess and profile who is publishing the accusations and how are they invested? Who stands to benefit? Are there any tell-tale signs that the attack is a front for a seemingly legitimate investor? Understanding whether there is any organisational or industry wide context for the timing of the attack can help to determine if inside information is being used. Crucially, it is important to assess each allegation and understand the true position of the Board.
No matter how sophisticated an attack, there is always a footprint. Knowing where to look is key. Often, clues or evidence of wrongdoing is contained in the information presented; do you have grounds to suspect a breach of confidentiality, trespass, hacking, insider dealing etc? Evidence to support this is often uncovered through analysing patterns of communications and data. The Board need to prepare for a follow up attack; a common tactic, and plan for where this may focus.
Without this, the option of taking action is harder. Using a combination of intelligence, legal, cyber and advisory expertise, it is often possible to uncover clues as to the location and or identity of the protagonist(s). Key to this is investigating how the attack is being disseminated. Is it spreading on social media, through a journalist or an analyst for example? Understanding the delivery method helps to zero in on the source. This can be done directly or through reverse engineering the networks involved.
This is where the Board needs to take an objective, sanguine approach. Short attacks thrive on creating doubt. Often, the worst damage stems from Boards issuing aggressive, blanket denials seeking to reassure investors. This backfires if subsequently aspects are found to be true. Even if innocuous, this calls into question Board credibility, and achieves the short sellers’ objective. Likewise, vows to call in regulators are often used by journalists to provide a public interest defence to their reporting. Regulators are not employed for corporate protection and if a regulator decides to investigate, the Board loses control of the direction of events.
With an understanding of the attack and its motives, Boards will be better positioned to:
- Make impactful, watertight responses focused on shareholders, analysts and the wider market.
- Recognise that all businesses can improve in some way and willingly enact any meaningful operational changes that are required
- Inform legal strategy
- Expose the attack as malicious and false through legal and communications channels
- Design processes to ensure greater future resilience (for example set up of targeted early warning monitoring)
Resilient companies, with systems in place to protect themselves and learn from reputational events can recover quickly from dips in share price. In order to respond effectively, Boards need to start talking about short selling now and looking inwards to understand how and where they might be vulnerable. Understanding that even if the worst happens, it can be overcome creates confidence in the investor community, and allows businesses to operate with confidence even in uncertain times.
To read part one of this short selling series, click here.Receive our monthly newsletter