Interactive Small Caps

Interesting take on XBRL for small caps and microcaps on the SEC’s Government-Business
Forum on Small Business Capital Formation
being held today.

According to speakers including Malcolm C. Persen, CFO at Radyne Corporation, Chris
Whalen
from Institutional Risk Analytics and Greg Adams from EDGAR Online, Interactive
Data will help new investment vehicles such as hedge funds, and the buy-side
generally, to access small and micro-cap companies as a hitherto-ignored asset
class. Fund managers are looking for a competitive edge, and the small-cap
world is believed to offer that. Investors like the Virginia Retirement System
would feel that they are better able to cover those types of stocks if a lot of
the labour-intensive work can be avoided. XBRL offers a way for them to gain a
better understanding of the business, without incurring a lot of the complexity
and expense that they encounter today.

In fact, all the points from Assoc. Prof. Deborah
Allen-Hewitt
, who sits on the Investment Committee of the Virginia
Retirement System, were well made. From her perspective (backed up by Chris
Whalen) the problem is not too few analysts on the sell side. The sell side is
likely to continue to focus on the big end of town. The entire investment world
will become their own analysts, and Interactive Data will make the financials
more pervasive, facilitating that analysis and investment. This is a new
business model for financial analysis. According to Prof. Hewitt, XBRL could
mark a watershed in the speed, accuracy and availability of information. That
said, investors want something new. Broader, deeper data about companies is
what investors really want to see, and XBRL provides a great way to provide it.

There are 15,000 odd companies that are outside of the Russell 3000. According
to the panel, Interactive Data will help small companies make their story
because the information will be better, more believable and more transparent.
It will help investors sift this information, which is why there is a real
advantage in being an early adopter. The first group of small companies to get
involved will be the first to be identified.

Unsurprisingly, there was a uniform call for improvements to tools that the
user community can take advantage of. We’ll see if we can do our bit 😉

Making Sun (Even More) Transparent

Jonathan Schwartz’s post about the problems with transparency was interesting. There is a simple answer of course – stop innovating and then performance reporting can stay absolutely static 😉

Specifically though, Sun’s admirable drive for transparency could be pushed along with some hard numbers, internet style. The SEC’s voluntary filing program for XBRL (which got a huge push earlier this week) is the perfect opportunity to experiment. You don’t have to publish your interactive data at the same time as your earnings release, or your 10Q/10K. You can start and stop when you like. You do need to make sure you publish valid information, but that’s not so hard. You can even make it accessible (needs Acrobat 7.0 or better) to the masses.

It seems to me that blogs like Jonathan’s go down incredibly well with customers, prospects and partners. And probably makes competitors green with envy.

But will they make an impact with Wall Street analysts? Certainly. For the tech-savvy ones. To get the rest it is important to connect the strategy (that Jonathan is articulating in a very clear manner) with performance metrics. Obviously, not all of those metrics are in the financial statement — they are more the preserve of the MD&A. And, as Jonathan points out, the market shifts and the technology changes, which means that KPIs that were relevant yesterday are far less so today.

One approach, which seems like a step forward, is EBR. An initiative of the AICPA, the Enhanced Business Reporting Consortium seeks to provide a market, rather than regulatory, framework for the agreement and publication of standards for performance reporting. The EBR goals seem commendable:

  • Give the capital markets relevant information
  • Eliminate stale and redundant disclosures
  • Make information easier to use
  • Collaborate with users and suppliers of capital; and
  • Enhance the integrity of the capital markets.

And are fully in line with the common sense of one of our main ultimate shareholders:

"At Berkshire, full reporting means giving you the information that we wish you to give us if our positions were reversed. What Charlie and I would want under that circumstance would be all the important facts about current operations as well as the CEO’s frank view of long-term economic characteristics of the business. We would expect both a lot of financial details and a discussion of any significant data we would need to interpret what was presented." Warren Buffett, Chairman, Berkshire-Hathaway, Inc. 2000 Annual Report

Overall, one of the main ideas of EBR is that industries should come together to agree clear, comparable definitions of industry-wide metrics, and individual companies should define more specific value drivers and describe how they can be measured. Then publish those results, in timeframes that make sense, using XBRL. The market gets clear, unambiguous messages about what management is driving towards over the long term and sees how it is measuring itself.

The EBR consortium hasn’t really taken off at this stage. The accounting industry has been a bit preoccupied with the present, rather than defining the future, and in any event, the leadership should probably really come from Corporates rather than their advisers and auditors. But it’s a worthwhile goal. The process of getting a taxonomy together for these types of disclosures is something that individual companies, or entire communities, can collaborate on, whether or not they wrap it up in consortium tape.

The specific problem of a new product not fitting into a well-defined existing segment is something that XBRL handles really well by the way (it reflects accounting 😉 ) — you can disclose metrics split out across multiple segment hierarchies. So disclose information using the "old" splits, and, if it helps improve the way that performance is described, also disclose using a new set of breakdowns that better reflect the way the market is changing. If you want you can even use the new dimensions capabilities of XBRL to neatly constrain these splits.

By the way – Tim Bray gave a great talk about standards adoption (and, yes, provided another hint to us to keep things simple) at a conference run by XBRL-US in January.

Sun participating in the VFP is a natural next step.
With disclosures in 11 languages, if you like!