Bob Schneider is a Partner in 
Wilson So is the Director of Hitachi America, Ltd. Why Small Investors Deserve XBRL-Enabled Statements
Written by Bob Schneider Posted on August 23, 2007
Last weekend I watched L’Eclisse, a movie by the brilliant and revolutionary (or, if you prefer, pretentious and incoherent) Italian filmmaker Michelangelo Antonioni. The film, which features an intriguing scene of a mini-crash at the Rome stock exchange in the early Sixties, just happened to reach the top of my Netflix queue during a week of similar distress for world bourses. Against the backdrop of current headlines, the film’s depiction of investing Italian-style offers a useful filter for viewing the case for fully transparent XBRL-enabled statements.
The information supply chain of the small investors Antonioni portrays is composed of tips, rumor, buzz, and insider indiscretions. When those fail, they consider throwing salt in a last-ditch attempt to elevate stock prices. In other words, these are not people who would be inclined to use the SEC’s Interactive Financial Reporter Viewer.
For these aspiring members of Italy’s new middle-class, Fiat, Pirelli, and other powerhouses of the Italian economic miracle are merely numbers on a roulette wheel. Revenues and cash flow, much less a new accounting standard for pensions, are not part of the agenda. In fact, the only time “the fundamentals” are (barely) mentioned is when a broker resorts to banalities about the “strength of the industrial system” and “good liquidity” to pacify his newly poor clients.
I know comparing these Sixties-era small-time speculators at one of Italy’s secondary bourses (Milan, of course, was and is the country’s financial center) to individual investors in the US today is wrongheaded. Unlike Italy at that time, the growing interest in economics and investing in the US throughout the Eighties and Nineties, coupled with the availability of extraordinary and inexpensive information resources on the Internet, has today yielded a large and expanding group of US individual investors who are savvy and sophisticated about financial markets.
But what proportion of America’s 90-odd million investors do they represent? Those of us in financial fields who find ourselves discussing investing on an airplane or at a cocktail party will not infrequently discover that our interlocutors have more than a little in common with Antonioni’s characters. Their focus is more on how much money can be made how quickly rather than any of the nasty little details that might help them to do so.
In other words, I’m skeptical about just how many individual investors are eager to do their own investment analysis of companies and want easy access to much greater amounts of financial information. Yet I still come down strongly and unhesitatingly on the side of those who want to make as much financial information as possible publicly available in XBRL, the convenient, drillable, and flexible data format.
The most obvious (if strongest) reason is that it will improve the analysis done by professionals at the financial services firms who manage the funds through which most individuals invest, either individually or through third parties such as their employer. Moreover, the work done by the pros tends to trickle down to the investing public through both traditional and new media, and XBRL-enabled statements promise to improve the knowledge level of all investor classes.
But I also think it’s important to have interactive data statements available specifically for the direct benefit of small investors, even if only a small percentage actually wind up using them. In the Internet Age, making public companies as transparent as possible (without harming their competitive edge) is what a democratic government in a free society should do. (By the way, that goes for its own activities too, like legislative earmarks.) It’s not a privilege it’s a right we have as citizens.
Many will ignore that right and will continue the traditions of generations of small-time stock players before them. The whispers under the eaves of the stock exchange are merely replaced by anonymous posts in an Internet chat room; the phone call from the stock huckster simply becomes spam from the penny stock con artist.
But small investors will have a much better alternative, should they seek to use it. Some of them will take advantage of that opportunity. Most will continue to leave the analysis to the professionals. And those who do neither will suffer the consequences.
August 24th, 2007 at 5:20 am
Perhaps the biggest hindrance to XBRL is not cost then, as I suggested, and more about inertia. It would seem that a significant number of investors both large and small are reluctant to embrace the technology, for whatever reason.
While I praised the SEC for helping to push technological advances forward in the US, some in Germany feel that the legislator’s imposition of mandatory XBRL filings on interim reports was unwarranted. One interviewee told me yesterday that ‘nobody has applauded Germany for leading XBRL implementation in Europe.’
http://www.thecrossbordergroup.com/pages/165/IR+magazine.stm?article_id=11985
So it would seem that the jury is still out on whether XBRL should be a market driven initiative or imposed by regulators.
August 25th, 2007 at 4:57 am
I would not discount the cost issue as a major obstacle. The GAAP taxonomy project in the US appears to be headed toward a result that will be expensive compared to current alternatives. End users will be required to purchase specialized software and/or services in order to render and manipulate documents. And filers will apparently be required to employ consultants to prepare XBRL coded documents, especially the footnotes.
Aside from the growing likelihood of a political backlash from filers as and when the SEC attempts to impose the new standard, why does anyone in the XBRL community believe that a solution which is not cheaper than current alternatives is viable? It seems that the only way that XBRL can be adopted in the US is via regulatory fiat since virtually nobody in the consumer or filer communities seems to have taken notice.
And to that point, it should be remembered that the SEC cannot and probably will not mandate a standard which is not already widely used in the private sector. After years of effort by a lot of dedicated visionaries, we still do not yet have a viable business case argument to help advance adoption.