Companies Have A Blind Spot To Their Biggest Competitive Threats

from the the-internet-might-impact-my-business? dept

Years ago, I took a class on IPOs, where the professor (a Wall Street lawyer) said that if you ever actually read and believed the "risk factors" in a company's SEC filings, you'd never bother to invest. They're supposed to be the the absolute worst case scenarios, laid clean, so that any investor can't claim they were blindsided should everything go wrong. In fact, companies are often pushed to make the risk factors seem as scary as possible to avoid the possibility of a later lawsuit. However, as scary as you make them, that still doesn't mean that companies are doing a very good job figuring out what risks are really on the way. Joe Weisenthal does a nice job looking through a bunch of historical financial filings from companies as their market cap peaked to see if they accurately noted the biggest challenges to their business -- and found that they often do not note even the most obvious (in retrospect) challenges. For example, the big newspaper chain McClatchy claimed that the biggest threat to its business in 2005 was the cost of newsprint, barely noting the impact of the internet on any newspaper's core business plan. And that's in 2005 -- not 1995, when it first should have been occurring to folks at newspapers that the internet represented both a threat and an opportunity. He also checked out Microsoft's filings, noting that the company has been incredibly slow to recognize that Google was a competitor in its risk factors listings.

Of course, this raises some interesting questions. Are these companies really missing these threats? Do they start out so small and grow so fast that companies really are taken by surprise? Is it only in hindsight that it seemed obvious? Or is it that the companies don't want to admit these emerging offerings are really threats until they absolutely have to? And... if that's the case, who are they trying to deny the threat to? Themselves? Or their investors? It may be a little of all of that -- but it stands to reason that the denial runs across the board -- and part of it may simply be that companies don't want to admit that these "upstarts" are threats because it could actually serve to legitimize the threat and even accelerate it. Either way, it should make you question just how useful the "risk factors" really are. Even when they're designed to be as conservative as possible, they may actually be used to hide the real threat. Perhaps we need a more open sourced/Wikimedia approach to risk factors. I'd bet that in 2005, if you asked a bunch of knowledgeable folks about McClatchy's risk factors, they'd have named the internet ahead of newsprint costs.


Reader Comments (rss)

(Flattened / Threaded)

  1.  
    identicon
    Jim Harper, Nov 21st, 2007 @ 3:12pm

    Apply Game Theory to SEC Filings

    If I had to do such disclosures, I'd be most concerned with tipping off my competition. I would never prominently identify the real threats to my business. At most, I might hint around them, doing just enough to avoid liability should I fail to prevent that threat from manifesting itself in the way I was concerned with.

    What you'll find in these disclosures are threats that management are confident they can handle. The interesting stuff is what they don't know about and what they are currently wetting their pants about, neither of which should we expect to see disclosed, even if it's required by law.

     

    reply to this | link to this | view in thread ]

  2.  
    icon
    Mike (profile), Nov 21st, 2007 @ 6:04pm

    Re: Apply Game Theory to SEC Filings

    If I had to do such disclosures, I'd be most concerned with tipping off my competition. I would never prominently identify the real threats to my business. At most, I might hint around them, doing just enough to avoid liability should I fail to prevent that threat from manifesting itself in the way I was concerned with.

    Indeed. Thought, that makes me wonder what good "risk factors" are at all then?

     

    reply to this | link to this | view in thread ]

  3.  
    identicon
    Joseph Weisenthal, Nov 21st, 2007 @ 6:30pm

    Re: Game Theory

    Interesting point about only including the risks that management feels it can handle on. There have to be things that keep these guys up at night that they're not telling anyone.

    I also wonder what the point of this section is. As you stated at the beginning of the post, Mike, most of the risks are way overstated -- they make it sound as if every company is on the bring of disaster.

     

    reply to this | link to this | view in thread ]

  4.  
    identicon
    Dave Barnes, Nov 21st, 2007 @ 7:17pm

    Blindsided

    I worked at DEC in the 70s and 80s.
    We never saw the Personal Computer as a threat because we [employees] saw no need for them as our IT group provided great tools [All-in-One].
    What we failed to see was that zillions of IBM customers hated their IT organization and would buy these "toys".

     

    reply to this | link to this | view in thread ]

  5.  
    identicon
    Jim Harper, Nov 21st, 2007 @ 10:30pm

    Re: Re: Apply Game Theory to SEC Filings

    I doubt requiring companies to publish "risk factors" does much good. I'm not strong on securities law, but it's generally intended to protect the "mom 'n' pop" investor and I think it generally doesn't.

     

    reply to this | link to this | view in thread ]

  6.  
    identicon
    market research company, Nov 22nd, 2007 @ 8:27am

    blind spot for new entrants

    thats why we have a existence of companies like Apple, M'Soft and Google otherwise this world may have been dominated by Ford, GM, AT&T and GE.

     

    reply to this | link to this | view in thread ]


Add Your Comment

Have a Techdirt Account? Sign in now. Want one? Register here
Get Techdirt’s Daily Email
Save me a cookie
  • Note: A CRLF will be replaced by a break tag (<br>), all other allowable HTML will remain intact
  • Allowed HTML Tags: <b> <i> <a> <em> <br> <strong> <blockquote> <hr> <tt>
Follow Techdirt
A word from our sponsors...
Essential Reading
Techdirt Reading List
Techdirt Insider Chat
A word from our sponsors...
Recent Stories
A word from our sponsors...

Close

Email This