Is there a term that’s applied more unproductively in the world of standard-setting and regulation than “investors”?

It’s easy (and perhaps inevitable) for example to cite “investor protection” as a justification for almost anything a regulator might be inclined to do. But of course, “investors” is an extremely broad category, incorporating a wide range of skills and levels of engagement, and of the kind of vulnerability that needs or deserves much formal protection. In the past I’ve often given examples here of the concept being used incoherently; for example, I cited a CFA Institute comment that “Mispricing can occur if an investor fails to discriminate between a GAAP/IFRS-based earnings per share EPS and an adjusted EPS measure in the P/E denominator,” and said at the time:

• … that’s fine, but an investor who makes a major resource allocation decision based solely on applying some multiple to a single number is doing little more than gambling anyway. If he or she then compounds the superficiality of the approach by carelessly applying the calculation to the wrong number (and, presumably, by not meaningfully engaging with anything else in the financial statements or MD&A), then how well are things ever going to turn out? Trying to help such people (if they exist as more than theoretical illustrations) is inherently futile. To varying degrees, the articulation of the problem seldom gets past this same problem of trying to save investors from themselves, many of whom don’t want to be saved anyway.

I was thinking about this again because I happened to wander onto the “investor centre” section the IFRS Foundation website, introduced as follows:

• IFRS Standards are designed to meet the information needs of investors. However, understanding those needs requires active participation in our work from the investor community.
• We recognise it’s not always easy for investors to participate, or to set aside time to get involved. That’s why we have a range of ways for you to get involved, in the most efficient way. We need investors, not accountants (we have plenty of those already), and there’s no need for you to be an expert in IFRS Standards. What we really want is your insights into how investors use financial statements, and how you’d like to see IFRS Standards develop.

The plain language nature of the above suggests a reaching out all the way down to individual non-professional investors. At other times though it’s clear that the focus is more on the professional class, for example:

• Investors rely on the financial information provided by companies. Consequently, the Board has always sought the views of both buy-side and sell-side investment professionals throughout the standard-setting process.
• However, the Board believes that the interaction with the buy-side can, and should, be broadened. It can also be structured to become more effective. 

It seems that the “investor” or “user” feedback received from the IASB is often quite structured in its nature. For example, according to a staff summary, the 2020 discussion paper on goodwill and impairment received submissions from 8 “user representative groups”, 1 individual user; and 1 buy-side firm (one wonders whether those numbers would be considered disappointing given that the target audience covers, well, much of the world); this is in addition to 30 meetings with users and user representative groups. Inevitably, this runs the risk of prioritizing group think over truly independent perspectives, and the feedback that makes its way to the IASB meeting material is highly summarized, leaving Board members to parse the distinctions between “most users,” “many users,” “some users,” “a few users,” and so on. It’s unclear whether in such circumstances whether, for instance, a truly well-argued one-person view would make its way to the attention of the Board, or whether the process can fully account for the diversity of participant motivations and perspectives (such as the common phenomenon whereby people say things in meetings, whether for self-branding or other reasons, that don’t necessarily reflect their own behaviour).

At other times, the underlying notion of an investor seems alarmingly basic. For example, a recent Investor Update newsletter solicits submissions as part of the post-implementation review of IFRS 15, and provides an extremely cursory summary of “key aspects for investors to remember about IFRS 15.” Without wishing to nit-pick, it seems that an investor for whom the items cited were indeed the “key aspects…to remember” would be incapable of providing even vaguely useful feedback (it’s obvious that IFRS 15 introduced something “new,” or else there would be nothing to ask for feedback on, and it’s hardly helpful to tell us that the standard seeks to provide useful information (as opposed to the useless kind?) etc. etc.)

Overall then, the IFRS Foundation’s emphasis on reaching out to investors is necessary and commendable, but seemingly rather futile in at least some aspects of its current form…

The opinions expressed are solely those of the author.