I propose an annual investor satisfaction survey covering the FASB’s priorities and progress over the previous year.
October is the month when we run our mid-term student evaluations for the courses taught at Columbia Business School. For the uninitiated, students rate their satisfaction with the rigor and usefulness of the course taught and the instructor. Despite all the criticism associated with student evaluations (they become a popularity contest, it’s easy to buy ratings by teaching softball topics, they value delivery over content, it’s difficult to run a popular but rigorous class etc.), they serve a useful purpose. In repeated trials, student evaluations do tell us whether the course is misfiring or whether the instructor is unable to either inspire or inform students.
Which brings me to the question at hand. Why don’t we see the analog of student evaluations in the world of regulatory agencies? Businesses spend a great deal of time and money to discover latent preferences and needs of their customers. After launching a product, good businesses try to understand customer satisfaction associated with the product in micro markets, sometimes at the neighborhood level. All this is now so much easier to pull off on account of increasingly digitized data at the customer level.
Other domains rely extensively on customer satisfaction surveys. The Institutional Investor poll does something similar to rank top analysts every year. The American Customer Satisfaction Index (ASCI) is a respected well followed data item used to gauge the quality of economic output for goods and services as experienced by consumers of that output.
But why do we see virtually none of this with regulatory agencies that are meant to serve the interests of investors? Often, industry lobbyists are constantly in the ear of these rule makers complaining about how the elementary checks and balances needed for capital markets to function efficiently are too costly or onerous for businesses. The investor is rarely at the table to make the counter argument that inability to access basic information about publicly listed companies is equally, if not more, onerous, and burdensome for capital market participants.
As I have highlighted several times earlier, US public firms don’t tell us much about materials, labor, capacity, fixed and variable costs, how businesses add value in general, maintenance capex, acquisitions, stock based compensation, technology spending, economics of network businesses, worker compensation, foreign currency’s impact on revenues and expenses, segment disclosures, income tax expense, what’s in SG&A, R&D spending, and expenditure (or is it investment) on political lobbying and comparability.
What’s broken in the current system?
Conversations with FASB watchers and my own experience suggest the following issues with how the FASB is currently governed:
1) The FASB needs an independent party to facilitate and interpret investor feedback ensuring that investors are given sufficient context and understanding to be able to make their comments meaningful. This same independent observer needs to consider who exactly the FASB has outreached to and whether they are representative investors, as opposed to say a credit rating agency. This is not to say that talking with a credit rating agency is useless, but their perspective is driven by credit considerations and is likely to overweight accounting conservatism, an argument that has perhaps stopped the FASB from considering capitalization or even greater disclosure of intangible assets.
2) There needs to be consideration of whether the FASB’s failure to incorporate investor feedback has so disengaged investors that the FASB has arguably a systemic problem with engagement. An investor I spoke to stated, “it is not worth investors’ time to pore over three consultations on income taxes, each separated by 3-5 years and to revisit everything to no avail.”
3) The annual investor outreach report that the FASB publishes should not simply discuss how many people they touched but provide real examples of feedback they received and followed. A report similar to BlackRock’s engagement report would be an improvement. BlackRock details engagement priorities, a list of companies they engaged with and on what topic, and what, if anything, was the outcome of such engagement.
4) The FASB is structurally and systemically organized such that investors are in the minority as two of seven members with one academic on the board. Investors I spoke to allege that the FASB is more likely to pick investor members that will go along with the establishment position. This investor asks, “are the investor members really representing investors?” On that point, Chakravarthy (2019)’s work suggests that, “the evidence is consistent with a decline in the level of ideological diversity among FASB members.”
5) Does an independent body review the statements regarding stakeholder feedback used in the basis for conclusions when a rule is adopted?
6) Does the FASB have the resources, experience, expertise, and the technology to validate or test preparers’ assertions that their information systems cannot handle requests for specific data items that investors might ask for?
7) Does an independent party evaluate whether the scope reductions in proposed rules to get to achievable standard setting are supported by process and evidence? When the FASB reduces scope of rulemaking, how are the agenda items defined to fit some kind of future standard-setting master plan? Or are the omitted items left as scraps on the cutting room floor that we never go back to in the short or medium term?
8) Another investor I talked with asks, “does the FAF, the FASB’s ruling body, have investors with sufficient knowledge of FASB and accounting standards to pushback on the FASB’s decisions?” How does the FAF assess the success or failure or investor responsiveness of the FASB’s performance?
So, what, if anything is a fix?
The issues I raise are deep rooted and difficult to fix in the short run. Perhaps some of these concerns could be addressed by a reinvigorated, repurposed, public-facing Investor Advisory Committee of the FASB. In the short run, I have a more modest proposal.
I propose we run a survey among serious investors (institutions) and a few hundred randomly selected retail investors every year where we ask the survey takers whether the FASB has delivered on its stated goal of establishing and improving financial accounting and reporting standards to provide useful information to investors.
· I propose we ask the following questions:
o Who is the current chairperson of the FASB? (please don’t look up the answer on the internet)
o How important is the FASB’s work for your investment analysis and decision making (scale 0 to 10, 10 suggests highest importance)?
o Which reporting topics should the FASB focus on in the short term, medium and long term? Can you rank order them?
o Which topics should be removed from the current FASB agenda?
o How responsive is the FASB to your concerns about the usefulness of financial reports (scale 0 to 10, 10 suggests extremely responsive)?
o A loose investor version of a net promoter score for the FASB: “on a scale from 0 to 10, with 10 suggesting extremely likely to support, how likely are you to support a regulatory alternative to the FASB?”
You might wonder why I ask about the name of the current chairperson of the FASB? A senior institutional investor, who I showed this survey to, retorted, “the number of institutional investors that could name the current (or a past) chair of FASB would comfortably fit in a coat closet.” That’s somewhat troubling as it highlights how technocratic the market for accounting and reporting discourse has become. Highlighting the lack of institutional investor interest in reporting is arguably an even more important outcome of my proposed survey.
In general, I hope that collecting data of this kind in a systematic manner and publishing such data will make the system better as a whole: the FASB will get insight into what keeps investors up at night. Investors get a chance to express their views or frustration with the progress that the FASB has made in the previous year in addressing their concerns about financial reporting.
These surveys, as mentioned earlier, will also generate counter points to industry’s almost reflexive pushback that any new reporting rule is a compliance burden with little to no payoff to shareholders. It would be useful to understand whether shareholders concur with that sentiment or not. Comments welcome, as always.
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