More company information is better – including pro forma earnings

Baruch Lev has a new (published last November) book (Winning Over Investors) and Harvard Business Review article on corporate financial reporting (“How to Win Investors Over”). Bottom line: “Corporate managers who don’t share relevant information face a substantial share price discount, a higher cost of capital, and a more volatile stock price.”
He doesn’t get in to a lot of detail in the article about reporting of intangibles. But he does advocate the use of pro-forma accounting as a compliment to the required GAAP accounting:

I see nothing wrong with managers’ honest attempts to improve on GAAP earnings by releasing alternative numbers, particularly after the 2003 SEC requirement that non-GAAP measures included in earnings releases and statutory filings be reconciled with GAAP numbers. Because pro forma earnings are disclosed along with, not in lieu of, GAAP earnings– and the differences between the two measures are highlighted–investors cannot be worse off with pro forma earnings. On the contrary, they are better off.
. . .
GAAP is particularly deficient at satisfying investors’ information needs about “change” companies. These include innovative, intangibles-intensive enterprises; high-growth and early-life-cycle businesses; and organizations undergoing strategic restructuring. If your company has any of those characteristics, you should give serious thought to systematically releasing pro forma earnings and other non-GAAP information, such as the number of patents granted during the period specified, the churn rate of customers, and the gains from online activities.

I would go a little further and argue for some standards on that pro-forma accounting – so that it can be used to make year-to-year, company-to-company, and industry-to-industry comparisons.
But I like the strategy of going around the deficiencies of GAAP accounting using the allowed mechanism of pro forma reports.

Is the high tech VC model really in that much trouble?

Here is a very sobering story from Silicon Valley from the New York Times a couple of weeks ago — “Tech Valuations Defy the Restraints of Reality.” The story mentions three points that I find especially troublesome:
1) money seems to be chasing ideas (good, bad or indifferent):

Some investors no longer even need to hear about a company to hand out money. Jakob Lodwick, an entrepreneur and co-founder of Vimeo, recently raised $2 million simply on the promise that he might have a good idea for a company in the near future.

2) VCs seem to be playing games as to what they are really backing:

Paul Kedrosky, an investor and entrepreneur, explained in an interview that one reason valuations are so wildly inflated is that venture capitalists want to be associated with a potentially successful start-up just so it looks good in their portfolio. This, he said, has driven absurd buying on the secondary private market, where stocks are bought and sold before a company goes public.
“There is massive buying on the secondary market by venture guys just for the showmanship of it,” he said. “These buyers are much less price sensitive and just want a company in their portfolio so they can stick the logo on their Web site.”

3) smart money seems to be betting against the VCs:

“I have never seen such a generation of people shorting tech stocks,” Mr. Kedrosky said, noting that he too has chosen to bet that Groupon, Zynga and LinkedIn will fall significantly in value. “Usually the short community is more nervous about it, but there is a monolithic view that this generation of technology I.P.O.’s is completely broken”

Not a good state of affairs.

4Q GDP – the expectations game

So — yesterday there were stories about how 4Q GDP would hit 3%. This morning, the BEA announced a 2.8% growth in GDP in the 4th quarter. And all of a sudden good news is bad, as the Wall Street Journal noted: “Stock Futures Take Hit After GDP”. This, even though as the Journal noted in another story, “The U.S. economy grew at its fastest pace in more than a year and a half in the final three months of 2011, signaling a sturdier recovery took hold despite troubles in other parts of the world.”
And I would note that this is the “advanced” estimate of GDP. It is subject to revisions, to be release on February 29 (second estimate) and March 29 (third estimate). So the number will change – guaranteed.
By the way, the same thing happened yesterday with respect to the Index of Leading Indicators — as the Wall Street Journal reported: “The December increase was half the 0.8% increase expected by economists surveyed by Dow Jones Newswires, but the index has increased for three consecutive months, indicating a strengthening domestic economy, the [Conference Board] report said.”
Maybe we should stop asking economists for their predictions.
I will stick to what the numbers say, not economists guesses as to what they might say. The economy grew by a modest but increasingly larger amount in the 4th quarter of 2011. And the biggest drag on the economy was the cuts in government spending.

Athena Alliance Advisory Committee formed

The jobs and economic growth crisis remains central in the current U.S. political debates. But new solutions — geared for the 21st Century Knowledge Economy — are needed. As Federal Reserve Board Chairman Ben Bernanke noted at a May 2011 Athena Alliance event, the topics of innovation and intangible capital “are central to understanding how we can best promote robust economic growth in the long run.” To help promote job creation and economic growth in the United States, Athena Alliance is announcing the formation of an Advisory Committee to advance its work on intellectual capital and intangible assets and their central role in the economy.
“The future of the U.S. economy is knowledge intangibles. This is where we enjoy a competitive advantage second to no other nation. Yet we continue to cling to industrial-era conventions that ignore and devalue these critical assets,” explained Mary Adams, co-chair of the advisory board, principal of Trek Consulting and author of Intangible Capital: Putting Knowledge to Work in the 21st Century Organization. “Athena’s work is unique in helping promote approaches to management and innovation that will tap the intangible capital lying fallow in American communities and companies.”
The mission of the Advisory Committee is to expand Athena Alliance’s understanding of these changes taking place in the US and global economy and to offer ways to meet the economic challenges arising from the emerging interconnected knowledge intensive world. With the advent of the new year, the Advisory Committee is aggressively starting to build support for the policy issues that will drive positive change and to create collaborative relationships and develop partnerships to bring national attention to the critical issues surrounding intangibles.
“Now is the time to take the work of the Athena Alliance to the next level,” said Andrew J. Sherman, co-chair of the advisory board, partner at Jones Day and author of the newly-released Harvesting Intangible Assets. “The proper management and harvesting of intangibles can be an engine for job growth and economic recovery, at a time when all companies and the government need to be capital efficient in its strategic planning.”
The Committee members comprise a wide range of individuals with hands-on experience with the measurement, management and monetization of intangibles.
“The Advisory Board will significantly advance Athena Alliance’s programs as it reflects a broad spectrum of individuals from a variety of backgrounds and experiences,” said Richard Cohon, Athena Alliance’s Chairman of the Board. “These Advisory Board members have proven track records of understanding and utilizing intangibles assets to create competitive advantage and finance innovation.”
Advisory Committee Members: (affiliations for identification purposes only)
Mary Adams, ICapital Advisors — co-Chair
Mary Adams is a co-founder of Trek Consulting, co-author of the breakthrough book, Intangible Capital: Putting Knowledge to Work in the 21st Century Organization and founder of the 300+-member ICKnowledgeCenter on-line community. Prior to co-founding Trek in 1999, Ms. Adams worked for 15 years in high-risk finance at Citicorp and Sanwa Business Credit.
Andrew Sherman, Jones Day – – co-Chair
Andrew Sherman has served as a legal and strategic advisor to dozens of Fortune 500 companies and hundreds of emerging growth companies. The author of 17 books on the legal and strategic aspects of business growth, franchising, capital formation, and the leveraging of intellectual property, his latest book is Harvesting Intangible Assets.
Joe Dyer, iRobot
Vice Admiral Joseph W. Dyer (U.S. Navy, Ret.) oversees operations at iRobot as Chief Operating Officer. He came to iRobot in 2003 from a career in the U.S. Navy where he last served as the commander of the Naval Air Systems Command, where he was responsible for research, development, test and evaluation, engineering and logistics for naval aircraft.
Gabe Fried, Hilco Streambank
Gabe Fried is the CEO of Hilco Streambank, the intangible asset valuation and disposition arm of Hilco Trading LLC. Mr. Fried has authored numerous articles for the Turnaround Management Association and American Bankruptcy Institute and is frequently a panelist for both organizations.
Allen Howell, Corporate Flight Management
Allen Howell has been in the aviation industry for 30 years, and for the last 13 years, he has been at the helm of Tennessee-based, Corporate Flight Management as its CEO. In 2011, he launched Social Flights, which markets private aviation flights through Web 2.0 social technology.
John Hudson , Deloitte
John Hudson is a Senior Manager in Deloitte Financial Advisory Services LLP with more than fifteen years of experience valuing businesses and intangible assets.
Don Kuratko, Johnson Center for Entrepreneurship & Innovation, Indiana University
Dr. Donald F. Kuratko (“Dr. K”) is The Jack M. Gill Distinguished Chair of Entrepreneurship; & Executive Director of the Johnson Center for Entrepreneurship & Innovation at Indiana University. Professor Kuratko has authored 28 books over 180 articles on aspects of entrepreneurship and corporate innovation.
Bob Laux, Microsoft
Bob Laux is the Senior Director of Financial Accounting and Reporting at Microsoft Corporation where he interacts with and responds to accounting standard setters on numerous issues. He was an Industry Fellow at the Financial Accounting Standards Board working on emerging issues. Before that, Mr. Laux spent eight years at General Motors managing their external financial reporting.
Jim Malackowski, OceanTomo
James E. Malackowski is the Chairman and Chief Executive Officer of Ocean Tomo, LLC, an integrated Intellectual Capital Merchant Banc™ firm. Mr. Malackowski is a member of the IP Hall of Fame Academy and is currently the President of The Licensing Executives Society International, Inc. He began his career spending fifteen years as a management consultant and forensic accountant focused on intangible assets.

Research opportunity on new direction for innovation policy

As readers of this blog know, I have long advocated for a broad view of innovation to replace the science-driven, technology push vision of the linear model. So I am very excited to pass along this announcement from NBER:
The Changing Frontier: Rethinking Science and Innovation Policy
With the 1945 publication of Science: The Endless Frontier, Vannevar Bush established an intellectual architecture that helped define a set of public science institutions that were dramatically different from what came before yet largely remain in place today. Now, at the start of the 21st century, many aspects of the science and innovation system ­ from its organization and scale to the role of geography, networks, and legal institutions ­ have witnessed important changes, with potentially substantial implications for the design of science policy and institutions both today and in the decades ahead.
With funding from the National Bureau of Economic Research and the Erwin Marion Kauffman Foundation, the conference and subsequent volume will explore two overarching questions: (1) what are the critical dimensions of change in science and innovation systems, and (2) what are the implications of these changes for policies and institutions in the 21st Century?
Topics of interest include, but are not limited to:
* The influence of increasing market scale and globalization on the demand for and supply of innovations;
* Innovation in financing, such as venture capital, and the role of entrepreneurship in driving innovation;
* Changes in the knowledge production function, including the human and physical capital intensity of R&D, changes in the salient features of the scientific workforce, and the implications of new research tools;
* Shifts in the geography of R&D, including regional and international dimensions, the implications of shifting geography for where the returns to R&D are captured, and analysis of the evolving forces that shape agglomeration and collaboration tendencies;
* Changes in intellectual property regimes and their use, with particular reference to its impact on licensing and alliances;
* Changes in public views of science;
* How information technology and digitization are impacting the production and diffusion of knowledge;
* The evolving roles of different research institutions (including government agencies, universities, and the private sector) in regional, national or global innovation systems, including changes in the relative scale of these types of institutions, the organizational forms these institutions take, the incentive mechanisms these institutions provide, and the ways these institutions interact;
* Unique features of “new” innovative sectors (e.g., biotech, clean energy, nanotech, and mobile broadband) and any implications for innovation policy; and
* Interactions among the above.
This list of topics is intentionally broad and open-ended, and is meant to simply highlight some of the many possible areas witnessing substantive changes in the science and innovation process that may also raise important questions for policy and institutional design.
Interested authors are encouraged to submit a 2-page research proposal that includes an abstract of the intended paper, an outline of the methodologies to be used, and a brief statement about the current state of the research project. The research proposals are to be submitted by April 15, 2012 to Accepted papers will ultimately be published together in an edited volume.
Authors will be notified of acceptance by May 6, 2012. A pre-conference is scheduled to be held in Cambridge, MA on October 26 and 27, 2012, and the formal conference will be scheduled for summer 2013. Authors of accepted papers will be reimbursed for regular transportation expenses for both the pre-conference and conference, and receive an honorarium of $7500 for timely submission of the draft and final manuscripts.
Conference Organizers
Adam Jaffe, Brandeis University and NBER & Ben Jones, Northwestern University and NBER

Getting it so wrong, so wrong

I think Matt Yglesias has lost it. His reaction to last night’s State of the Union is an over-the-top screed against manufacturing (President Obama’s muddled plan to boost employment by hindering trade). The President’s sin was the suggestion that some other countries, such as China, aren’t playing by the rules when it come to trade and that we should enforce the trade laws. And then the President had the audacity to say that manufacturing was important. That sent Yglesias off into the never-never land of “manufacturing doesn’t matter” and “services will save us.”
Here is a perfect example of how he misunderstands. Yglesias states, “Indeed, even in the fabled industrial juggernaut of Germany, 68 percent of the population works in services.” Of course. It is that “industrial juggernaut” that supports those services jobs. And many of those “services” jobs are actually part of the manufacturing process. And that the Germans are light-years ahead of us in figuring out the fusion between manufacturing and services.
With muddled thinking like this that passes for “expert analysis”, no wonder we can’t make any headway in the public debate.

SOTU 2012

OK, so the President didn’t use my suggestions on what to say about innovation (see yesterday’s posting). But I did like the President’s speech. It was a positive speech, a forward looking speech, and, at times, an in-your-face speech. One of the re-occurring themes was “I won’t back down.” I was especially pleased to hear this in reference to the Administration’s policies on worker retraining and on funding for the development of clean energy technologies. These programs have been under attack lately – so it was good to hear the President defend them. While I believe these programs are not enough, the idea that we should cut them back is wrong. The easy course for the President would have been to side step them. Instead he choose to push forward.
In an interesting twist, the White House has prepared a slideshow to accompany the speech and a background paper on the economic policies — Blueprint for an America Built to Last. Unfortunately, both the speech and the Blueprint did not break any new ground when it come to innovation. The President reiterated his support for small business and entrepreneurship, for basic R&D and for clean energy technologies. In this time of tight budgets, such a limited set of proposals may be all we can realistically expect. And even there, we may not get all that is needed (for example in the R&D budget).
So the fight continues.