ALMOST 20 years ago, one analyst was projected into national fame, or notoriety, by a simple means. He looked at the fundamental accounting used by some of the largest companies in the UK and homed in on the techniques they were using. And he was amazed. So what he did was take each of the ones he considered as dodgy stratagems and issued research notes on them. He assigned a blob for each dubious technique and published company-by-company notes that showed which companies had the most blobs.
It was a very simple notion. And it had several effects: some desired, some not. The companies were furious. His employers were not too happy. And a publisher thought it was the way to a business bestseller. The analyst’s name was Terry Smith, a cheerful Essex lad who said what he thought in a direct way. His employer, UBS Phillips & Drew, showed him the door. The companies tried to stop publication of the book. But Accounting For Growth appeared and was indeed a bestseller.
Another chap who said what he thought in a direct way was also coming to prominence back then. This was David – now Sir David – Tweedie. He looked at the same accounting abuses that Smith was pinpointing. It was one of those moments when cultural change comes about, and gradually the landscape transformed.
These days, Tweedie has just stood down after a twenty-year stint at the UK Accounting Standards Board, and then another decade at the International Accounting Standards Board, where he did the same thing but on a world stage. Terry Smith remained in the City and built his own broker business and now runs Tullet Prebon and an investment fund, Fundsmith. He has no doubt that the business world is a better place for the efforts of the Tweedie revolution. He now inhabits an office near the top of the City’s tallest building, watching over it all. And although he thinks that what he describes as Tweedie & Co did most of the work needed to change the way that companies use financial reporting, Smith claims that there are still problems. They are related to governance, and they are linked to his old business of being an analyst.
“I suspect the problem now lies in the presentational side rather than the accounting,” he tells me. “I would bet that the bulk of analysts and investors don’t read the accounts anymore.” He is putting his finger on the real downside of the information overload that the internet has brought us. When everything is available online, it is very easy for people to think they are on top of all the corporate information coming at them from all sides.
But reading, and thinking, is something that has probably slowly started to vanish. In his investment business, the one-time youthful rebel is now the voice of experience. “We read the annual report and the 10K of every company we invest in, and there should be lots of notes written on them,” he says. The thinking should be seen. It should be tangible. That is the benefit of paper. Analysts can make notes and remarks, make connections, and then, in a year’s time, they can come back, recreate what they thought then, and compare that with the corporate performance now.
Smith sees the disappearance of this as a significant problem. If analysts don’t use the tool that communicates the information, companies can change their behaviour. “So companies now just provide a press release with some numbers, leaving out the ‘except for’ stuff, and the world just reads that,” he says.
It is fundamental. “The press release shows a profit; the accounts say there is a loss,” points out Smith. This is where the big corporate battleground of the future lies. And this is where efforts at improving stewardship have a role to play. Back in the days when the efforts of people like Tweedie and Smith were making a difference, there was a different motivation. As Smith says of Tweedie and his reformers: “They had their own sense of right and wrong.” ?
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