I don’t like to blog on anything with a political angle, but sometimes it’s essential. The topic for today is the proposal to eliminate quarterly financial reporting in favor of semi-annual reporting. The question is whether it’s a good thing, and in particular whether it could be a good thing for tech. The good news is that while any public policy proposal has political roots, this happens to be a topic we can talk about pragmatically.
Let’s start with financial reporting and Wall Street’s influence on progress. Wall Street loves bubbles. While professionals can make money on stocks going down, everybody tends to make out better when they go up. Thus, when anything presents a hope of that, the Street is solidly behind it. Yes, the media also has a big role in hype waves, but what keeps them relevant is the fact that they make big money.
The problem with hype waves, is like all waves they crash onto the shore eventually. The Holland tulip bubble, the Florida land boom…and the dot-com crash are all proof points of how destructive the crash can be. The latter generated public policy backlash in the form of legislation popularly called “SOX”, for “Sarbanes-Oxley”, named after the senator and congressman who pushed it into law in 2002. The belief behind SOX was that financial analyst firms were creating bubbles by valuing companies on totally baseless future assumptions, which could then drive up their stocks. Arguably, this gave us things like WorldCom and Enron. What SOX wanted to do was force financial analysis to focus on pragmatic, objective, metrics like earnings.
Ah, but every political attempt to fix a problem tends to create another one. In this case, the “other one” was an obsessive focus on the near term. Financial analysts took their eyes off the stars and focused on their feet, and that’s a problem when something comes along that can’t reach fruition in a single quarter. SOX made companies worry almost exclusively about the next earnings report, focusing on sales that could be made quickly more than evolving business models that could succeed in the long run. This surely hurt innovation, because it’s hard to accomplish a revolution when you have to catch the next quarterly earnings train.
Not only did SOX create an innovation risk, it didn’t stamp out hype. Look at things like 5G, the cloud, and AI. Stocks go up because there’s more buying pressure than selling pressure, and hedge funds account for around 90% of market activity. If they jump on a stock, or a sector, or a concept, they can create an objective upward shift in the market that doesn’t need Wall Street research. They can justify their action based on the broader media position on a technology, and of course media interest is driven by excitement, by novelty, and not truth.
So maybe we should be eliminating quarterly reporting? Maybe even going to semi-annual reporting isn’t enough? Well, this could end up being SOX 2.0.
How long a runway should we allow a new technology to mature? I totally agree that three months isn’t long enough, so should we go to maybe a year, or two, or five? What’s the downside of a long reporting cycle?
Financial crashes are the downside. Right now, we have to level-set things periodically, and that means that a hype wave can’t get too high before financial-market signals start to arrest its growth. The reports don’t stop hype, but they do inject required caution into a market that’s predisposed to fulfill the desires of financial professionals and not the average investor. Lengthen the reporting cycle and you raise the height of the hype wave crest, so it can kill when it crashes down.
But what about innovation? It sure sounds like what we’re saying is that we can’t fix hype with SOX, or SOX 2.0, and any reporting cycle that’s less than the time required to build a technology to realization is going to stifle innovation. No good choices?
The question here, I think, is how to get financial analysis to reflect actual opportunity, how to make it objective and realistic. Let me offer a personal example. Back when Enron was doing its thing, I wrote often about how their numbers made no sense. I wasn’t shy then (and I’m not shy now) about talking about hype waves. The tone of the media, Street and tech, was against my view, and so things went on. Eventually, it was proved that their numbers didn’t make sense, and all manner of hearings were opened, trials launched. You’d think that after that, a lot of lawyers and publications would have contacted me to ask “How did you know?” Guess how many did. None. The point is that everyone loves a hype wave, nobody wants to put out a hype fire, and so it’s very unlikely that realism will get much attention as a way of approaching a topic.
No hope? Maybe a little hope. If we gave companies a little more time, lengthened the reporting cycle a little, we might see companies push on messages that were a bit more exciting and a bit more realistic at the same time. Do we tell AI fables because we don’t know the truth, or because the fable is way more attractive than the truth we can tell in a quarter? The answer to that will likely decide whether lengthening the financial reporting cycle (if it’s done) will help drive innovation.
