Weekly Thoughts


Weekly Thoughts: Sharing is… Caring?

Here is something that caught our eye this week:

Sharing Is… Caring?

Recently we put together a “Year in Review” of our business operations to share with various stakeholders.  We found reflecting on the performance of our company and establishing goals for the year ahead productive, but we did have internal debates regarding how much information to share in such a document.  Should we report only aggregated data or provide data for each company?  Do we consolidate financial information or show the entire chart of accounts?  In other words, where is the line between trust-inducing transparency and data overload?

After spending some time learning about how others approach such questions, we found that generally, the world seems to think more information is better.  According to a 2008 European Accounting Review article, economic theory supports the notion that increased disclosure reduces information asymmetries thereby reducing the cost of capital and agency costs, the gains of which more than offset any associated increase in required financial expertise and preparation costs.  Armed with confidence imbued by peer-reviewed economic research, we then learned about Alphabet Inc.’s approach to reporting, which is anything but granular, to say the least.  Matt Levine, author of Bloomberg’s Money Stuff, provides some insight:

“How much money does YouTube make?  It is a secret: Alphabet Inc., which owns YouTube, does not break out revenue for it separately.  Alphabet’s Form 10-K gets as granular as ‘Google properties revenue,’ meaning advertising revenue from Google search, Gmail, Google Maps, YouTube and other Google properties; that was $95.4 billion in 2017.  If 10 percent of that — a number that I just made up — came from YouTube, then YouTube had more revenue than almost half of the companies in the S&P 500 index.” 

The SEC noticed this lack of granularity as well and challenged Alphabet under the regulatory premise that investors must have access to the same information as an organization’s top executive.  Extended correspondence between the SEC and Alphabet shows that while Google’s CEO, Sundar Pichai, regularly sees all sorts of information about YouTube (which is part of Google), Alphabet’s CEO, Larry Page, does not, which means investors will have to get used to “Google Properties” for the time being.

While some may find this lack of transparency concerning, we do empathize with the notion that more information is not always better.  For instance, economist Fischer Black (of Black-Scholes fame) published Noise in 1986 which argued it is nearly impossible to distinguish between information and noise (Nate Silver argued a similar topic in his 2012 book, The Signal and the Noise).  Activist investor Nelson Peltz commented on how this can play out in an era of information overload, noting that board members of big public companies now get so much information it is almost impossible to synthesize.  From the WSJ:

“In an earlier era, Mr. Peltz said, directors would receive a FedEx package containing paper documents supplying them with the information needed in advance of upcoming board meetings. With the advent of email, PCs and iPads, directors get many more pages of documents in electronic form than they can possibly sift through before the meetings, he said. So management spends much of the meeting explaining key facts and issues that board members must consider. ‘So the board meeting becomes a show and tell,’ Mr. Peltz said.”

Even as a private company, we feel it is important that we establish the right paradigm for commenting on our results in a thoughtful but succinct way.  We operate in an often overlooked segment of the investment world without a lot of comps, which means we find ourselves creating, evaluating, and adjusting our own performance metrics in an iterative way as our rapid growth changes the framework for what is signal and what is noise.  For the moment, we have opted for a combination of consolidated financial reporting with detailed operational commentary, which preserves our ability to add additional useful information in the future while avoiding the potentially difficult step of eliminating something previously shared.  We likely won’t be answering questions from either the SEC or from Mr. Peltz anytime soon, but that doesn’t mean we shouldn’t think about reporting as if we were.

Have a great week,

Your Chenmark Capital Team

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