The ValueReporting Revolution: Moving Beyond the Earnings Game
Editorial Reviews
Review
Even with the recent drop-off in stock prices, there's still great variation in how financial markets are valuing companies. To add more predictability to valuations, says this team of authors from PricewaterhouseCoopers, companies should take the initiative and publicize the nonfinancial measures that can drive future success. Otherwise, they say, analysts and individual investors will rely on their own estimates, which inevitably either undervalue a company or set it up for a fall. The main trouble, they find, lies not in disagreements over the key drivers but in executives' age-old reluctance to divulge information. The book covers these important debates, as well as the shifting world of accounting principles and oversight, in a comprehensive fashion and with clear prose. Yet while parts of this lengthy, lopsided book are full of detail, the case studies of companies actually experimenting with new metrics are surprisingly thin. (The Harvard Business Review)
IN SEARCH OF A REPORTING IDEAL: Are you one of those investors who come away with a certain empty feeling after reading corporate reports and investor-relations Web sites?
From that much material, do you learn much about where a firm stands competitively, where it wants to go, how it plans to get there and how well it's equipped for the journey?
If not, there's a good reason. The reports are relics.
This is not a complaint about "earnings management." That's a problem, too. But the more fundamental dilemma of reporting by the modern corporation is how little it says about modern corporations.
At a time when "intangible assets" --brands, brains, ideas, research, and strategies for increasing competitive value -- are all important, they remain of almost no importance in conversational disclosure by publicly traded companies.
Indeed, a movement now exists dedicated to finding ways of making corporate reporting more complete, to developing methods of measuring and comparing assets that could supplement the measures currently demanded by the hallowed but sometimes hollow Generally Accepted Accounting Principles.
The movement is composed of academics, investment bankers, corporate executives, the Brookings Institution and big accounting firms, among others. A team from PricewaterhouseCoopers is about to publish a book on this subject called "The Value Reporting Revolution: Beyond the Earnings Game."
That title notwithstanding, it's not a "revolution." It's an ideal. The distance to be traveled to get to real change is vast. Many companies can hardly explain what they actually do, let alone what they might be able to do. As far as I can tell, every software company in America claims to be "the leading end-to-end platform" for "solutions." That's the level we're at.
Among those trying to push forward are Steven H. Wallman, Chief executive of Foliofn, who was harping on this when he was a commissioner at the Securities and Exchange Commission; Baruch Lev of New York University's Stern School of Business; and Robert G. Eccles, former Harvard Business School professor, head of Florida-based Advisory Capital Partners and a co-author of the new PricewaterhouseCoopers book on the subject.
To be sure, some of the participants-- such as the accounting firms-- stand to gain from a wholesale reevaluation of corporate reporting.
But individual investors stand to gain, too.
To see some embryonic examples of what can be done, go to the Web sites of the Skandia Corp, and i2 Technologies.
At the Skandia "Navigator" link, look at "Dial" the company's insurance telemarketing component, for example . In addition to providing the usual information, it gives investors, among other things, a detailed breakdown of employee turnover, employee education level, telephone accessibility of its agents, the time they've spent in training and a year-by-year "customer satisfaction index."
At the i2 Technologies Web site, investors will find, among other data, a survey conducted by the software company of cost savings achieved by customers using its services. I know most companies trumpet such claims. But i2 commissioned an independent accounting firm, which went back to the surveyed companies to check on the integrity of the data.
Of course, you say, such information is self serving, unstandardized, and unregulated. I would ass that it's also experimental.
Certainly it must be viewed skeptically. But as we learn every day, the same is true for the most rigorously signed, sealed, and audited data put forth under generally accepted accounting principles.
We should also be aware of attempts to get investors to look toward relatively vague qualitative measures and away from conventional hard numbers.
We need to see both. We need to know more.
After you've visited the Skandia and i2 Web sites, choose virtually any other publicly traded company and see what you learn about the factors that might make it profitable in the future, as opposed to evidence of profits in the past.
Try your own experiment. If you work in a company, look around you and take a mental inventory of the people, their skills and their ideas that give that company a future, if it has one. Then look at the face your company presents to investors and see to what extent, if any, it reflects that inventory.
Much of this information is non-financial, as are judgments about the competitive environment, workforce quality, innovative capacity and strategies for achieving specific marketplace goals.
Yet numerous surveys show that corporate executives, as well as, professional investors, consider such matters of high importance and sometimes greater importance that the conventional numbers in assessing a company's real worth.
Why don't more companies at least try to describe these "soft" assets? They consider them "internal", too dangerous in the hands of competitors. Or they can't quantify them. Or their lawyers are afraid of lawsuits.
"Financial reporting by public companies is a highly regulated space," writes Wallman in a Jan 18 Brookings Institution paper. It is "patrolled by corporate controllers, financial officers and investor relations professionals whose job it is to ensure that the company does not take unusual or unnecessary risk, and who have been inculcated with the notion that , in their area, liability for mistakes is far greater than the reward for innovation."
Yet he writes, "there is no doubt that the current regime is seriously out of step with what counts in the valuation of a company."
The corporate reticence described by Wallman is self-defeating, argues "The Value Reporting Revolution, " co-authored by Eccles, Robert H. Herz, E. Mary Keegan and David M.H. Phillips.
Competitors already have an understanding of much of this "internal information, the book argues. And keeping it so close to the vest contributes to an obsessive market focus on short-term earnings, contributing to price volatility and undervaluation, a problem documented by the research of NYU's Baruch Lev.
"The current reporting system doesn't do a bad job on normal bricks-and-mortar" businesses, Wallman said in an interview. "But it's not kept pace with the evolution of business models with intangibles as the main drivers of wealth. You end up with a rule that says that if you create an intangible -- a patent, brand loyalty, a name -- all the costs of creating that are expensed in the time period in which they are incurred and you show no assets.
"If you were to take the same money and build a building, that gets put on your asset sheet.... Amazon can spend a fortune on advertising, brand name recognition and software" and it looks poorer for it. "Barnes Noble can build a large bookstore and acquire land and it shows up as assets."
If companies can't properly measure and compare intangibles, how can they report them? I asked Eccles.
"When you go back and read the history of how the accounting profession and accounting standards developed in this country 70 years ago," he responded, "you'll find there were the exact same things said ' you can't quantify these things. These are subjective judgments.'"
But Eccles is confident tat "we'll get there". Companies are experimenting. Over time, he hopes, investors will find some companies forthcoming and others reticent and reward them accordingly in the stock market.
Companies may also feel compelled to act in order to counteract independent entrepreneurs who go out and market their own models for measuring corporate value. They may be forced to get their own versions to the public rather then lat others fill the void.
For further reading on this subject, visit Brookings Web site at www.brook.edu (go to "Intangible Sources of Value"), the PricewaterhouseCoopers site at www.pwcglobal.com (click "What's the Value of a Company?") and Professor Lev's home page in the faculty listings at www.stern.nyu.edu. (Fred Barbash, The Washington Post, February 4, 2001 )
"It is a good and readable Cook's tour around the frontiers of accounting. It's account of "the earnings game" is the best I've read."(Investors Chronicle, 2nd March 2001)
"...easy to read...plenty to keep the reader interested...a stimulating read, guaranteed to make you question the real value of traditional quarterly earnings announcements..." (M2 Communications) one of the best business books of 2001 (getAbstract, 15 January 2002)
getAbstract , 15 January 2002
one of the best business books of 2001
The ValueReporting Revolution: Moving Beyond the Earnings Game
The ValueReporting Revolution: Moving Beyond the Earnings Game,Robert G. Eccles,Robert H. Herz,E. Mary Keegan,David M. H. Phillips,Wiley,0471398799,Accounting - General,Business & Economics,Business / Economics / Finance,Business/Economics,Corporate Finance,Leadership,Organizational Behavior,Budgeting & financial management,Business & Economics / Accounting / Management,Business strategy
Hot Books:
Recommended Books