Clara Bennett: Max, I want to start today by just — putting a claim on the table and having you push on it immediately, because I think that's the fastest way in.
Max Rivera: Yeah, go — how was your week by the way, are you ready for an argument?
Clara Bennett: I'm always ready. Here's the claim: quarterly earnings reporting is not the villain in this story. The SEC mandated it in 1970 for roughly four thousand U.S. public companies — it's been the cadence for over fifty years — and I think we've spent decades blaming the calendar when the actual distortion is somewhere else.
Max Rivera: Hold on — 'somewhere else' meaning what, the compensation structures?
Clara Bennett: Compensation, yes. Stock-based pay tying CEO wealth directly to share price. The beat-or-miss mechanism that punishes a miss independent of whether anything real changed in the business. Those are doing more work than the reporting frequency itself.
Max Rivera: Okay but — I mean, I hear that, and then I look at the Graham, Harvey and Rajgopal survey and I get stuck. Eighty percent of senior executives said they'd forgo an R&D project with positive long-term value just to avoid missing a quarterly target. That's not 'the calendar made me do it,' that's — that feels like systemic coercion with a paycheck attached.
Clara Bennett: Rational response to a real incentive — I won't dispute the eighty percent. What I'd dispute is the leap from 'executives feel this pressure' to 'the system is therefore failing.' Those are separate claims.
Max Rivera: That's — wait, that's actually where I want to dig in, because — does the difference matter? If the behavior is the same either way?
Clara Bennett: It matters enormously for the fix. If the reporting cadence is the problem, you change reporting cadence — semi-annual, whatever. If compensation design is the problem, you restructure comp. Different levers, different costs, different people who resist the change.
Max Rivera: Huh. Okay, so the diagnosis actually determines whether any reform is real or just theater.
Clara Bennett: Exactly — and I think some of the proposed reforms are theater. Which doesn't mean short-termism isn't real. It means we should be precise about what's actually generating it.
Max Rivera: Alright, so — the thing we're actually trying to figure out: is this a structural trap that rational executives literally cannot escape given the system as designed, or is it a story we've built where quarterly reporting becomes the villain when the real causes are messier and harder to fix?
Clara Bennett: Both, actually — and that's what makes it hard to fix. But let me make the mechanism concrete, because I think the abstract framing is hiding what's really happening. Imagine you run a coffee shop and your landlord grades you every three months. Not on whether the shop is growing, not on whether customers love you — just on the numbers that quarter. You'd stop painting the walls. You'd stop training new staff. Not because you're short-sighted — because the grading system literally doesn't see those investments. That's the accounting asymmetry at work. R&D gets charged fully against earnings the moment you spend it. A capital expenditure — new equipment, a building — gets depreciated over years. So R&D is an immediate, disproportionate hit to the quarter. The architecture is pointing at it first.
Max Rivera: That's — okay, the coffee shop thing actually lands. The landlord doesn't see the wall paint.
Clara Bennett: Right — and importantly, this isn't a culture problem. It's a rules problem. Change the accounting treatment for R&D and you've shifted the incentive without touching a single compensation contract.
Max Rivera: Okay but — wait, I want to plant my flag here, because I think your framing actually has a hole in it. The beat-or-miss signal, the thing everyone's optimizing for — it might already be fake. FactSet tracks this: roughly 72% of S&P 500 companies beat earnings estimates every single quarter. Every quarter. That's not most companies having a good quarter. That's — I mean, if 72% of companies are beating, the estimates themselves are being managed down.
Clara Bennett: The analyst forecast walk-down.
Max Rivera: Exactly — sell-side analysts are systematically lowering their consensus forecasts in the final weeks of the quarter so companies can beat them. So the beat isn't information. It's theater. Which, yeah, actually — wait, that kind of cuts against my own point too, doesn't it. If the beat is manufactured, then maybe the damage from chasing it is also harder to measure than I was saying.
Clara Bennett: It cuts against both of us. If beats are partly manufactured, the supposed harm from short-termism is harder to pin down — but my case that the accounting asymmetry is the real distortion still stands independently of whether the beat signal is clean.
Max Rivera: No, I don't buy that they're fully independent.
Clara Bennett: In practice they are. The accounting rule exists whether or not analysts are walking estimates down. A CFO cutting R&D to preserve the quarter is responding to the expensing rule, not to whether the consensus number got tweaked in week eleven.
Max Rivera: Hm. Okay — but then why did stock-based compensation become the dominant model in the eighties and nineties? Because that's what actually tightened the screw, right? Shareholder primacy gets entrenched, CEO wealth gets tied directly to share price, and suddenly the quarterly number isn't just an internal metric — it's personal.
Clara Bennett: That's the historical engine, yes. The shareholder primacy shift in the eighties and nineties is what made the accounting asymmetry dangerous — before that, the R&D expensing rule existed but CEO pay wasn't riding on the quarterly number. Once those two things converged, the structure became coercive.
Max Rivera: So the accounting rule was the fuel and stock-based comp was the match.
Clara Bennett: And that match lit the whole toolkit. Because once you've got that convergence — accounting asymmetry, comp tied to share price — executives don't just cut R&D. They reach for anything discretionary: marketing, safety budgets, maintenance. Anything that can be reduced within a quarter without immediately showing up as lost revenue.
Max Rivera: Wait — the specifically within a quarter part is doing a lot of work there.
Clara Bennett: It is. That's actually the definition of discretionary in this context. Not 'optional' in the casual sense — discretionary meaning the revenue hit is delayed. You cut maintenance today, the equipment still runs this quarter. The impairment shows up later. So it's invisible to the earnings call in October.
Max Rivera: Okay, so — I want to make this concrete, because I keep thinking about this one scenario. A VP of engineering, mid-cap software company, Friday afternoon in September, walking into her quarterly business review. She knows before she sits down that R&D headcount has to be frozen for Q3. Not because the projects are bad — the projects are fine — but because the accounting will tank EPS before the October earnings call. That's — I mean, that's a rational person, right? She's not making a bad decision. The system is making the decision.
Clara Bennett: That's exactly right. And here's the part that makes it worse — the damage she's doing is invisible. Traditional financial statements don't capture R&D pipelines, they don't capture the team she's not hiring, the institutional knowledge that erodes. Investors literally cannot see it.
Max Rivera: The intangible asset reporting gap.
Clara Bennett: Right — brand equity, customer loyalty, human capital. None of it shows up on the balance sheet in a way that reveals erosion. So a willing investor who genuinely wants to reward long-term investment can't price it correctly. The information isn't there.
Max Rivera: And then there's buybacks on top of all of this, which — I mean, this is the part that actually makes me a little crazy. You repurchase shares, reduce the share count, EPS goes up mechanically. No improvement in the actual business. It's just — math. The number moves without anything real happening underneath it.
Clara Bennett: Accretive buybacks, yes. And they're entirely legal and rational given the incentive structure. That's the point — nobody's cheating.
Max Rivera: Which is — yeah, that might be the most depressing sentence in this conversation. Anyway — Amazon. Because Bezos literally wrote 'it's all about the long term' in his 1997 shareholder letter, at the IPO, and then actually built a company that way for decades. So the escape is possible. Why is it so rare?
Clara Bennett: Because Bezos had something almost no CEO has. Dual-class share structure — he held shares with superior voting rights. Actual insulation from shareholder pressure. That's not a management philosophy you can import. Four thousand ordinary public companies don't have that architecture.
Max Rivera: But — wait, so you're saying the lesson from Amazon is basically 'be a founder with control, or the system wins?' That feels like the exception proving the rule rather than a model.
Clara Bennett: I think it's specifically that. Dual-class structures are the condition, not the philosophy. The 1997 letter is inspiring, but it was enforceable because of the ownership architecture behind it. Strip that out and you have a CEO who wants to invest long-term and a board that can replace them when the stock dips.
Max Rivera: And whether that ownership condition can actually be built into reform — or whether we're just back to the same trap dressed differently — it's genuinely hard to untangle, and honestly where I think we land next.
Clara Bennett: And that's actually where I want to concede something, because I've been pushing on compensation and ownership as the real levers — but I need to be honest about the reporting calendar argument too. Semi-annual or annual reporting, the proposals that would reduce beat-or-miss pressure — I think those are insufficient on their own. If the engine is stock-based comp and ownership patterns, changing the cadence leaves the core incentive completely intact.
Max Rivera: Wait — you're conceding that? The reporting reform is theater?
Clara Bennett: On its own, yes. And the Harvard Law School Forum on Corporate Governance makes this explicit — they frame the short-termism thesis itself as contested. Some researchers argue capital markets are forward-looking enough that systematic underinvestment would just get arbitraged away. Meaning the problem might be smaller than the reform proposals assume.
Max Rivera: Okay but — I can't get past this. If markets are pricing long-term value correctly, then Baillie Gifford shouldn't be exceptional. They're an institutional investor built entirely around long-horizon ownership, and they're — I mean, they're a rounding error in a market dominated by shorter-horizon holders.
Clara Bennett: They are the exception. I won't argue that. But 'Baillie Gifford is rare' doesn't automatically mean 'markets are broken' — it might mean the majority of investors have shorter horizons because their clients do. That's a different failure.
Max Rivera: Huh. So you're saying it's — wait, actually no, that still ends in the same place for the executive freezing R&D, right? Whether the market is broken or just reflecting client horizons, she's still trapped.
Clara Bennett: In practice, yes. Which is why compensation design feels like the more direct lever to me. Not reporting cadence.
Max Rivera: Right — and I'll take that, I think comp design is probably more direct. But the thing I don't think we can skip is *why* comp got designed this way in the first place. Shareholder primacy in the eighties and nineties didn't just happen. It was a doctrine. And restructuring comp now means fighting the doctrine, which is — I mean, that's politically brutal.
Clara Bennett: That's fair. The structural root runs deeper than any single reform can reach cleanly.
Max Rivera: Which is — yeah, that's actually where we're genuinely disagreeing, I think. You believe the market has enough self-correcting capacity that the damage is bounded. I think the coercion is deep enough that even good comp reform gets captured by the same pressure it's trying to fix.
Clara Bennett: That's the gap. And I don't think either of us can close it with the evidence available — because the Harvard Law Forum research cuts both ways. It names the problem as real AND as potentially overstated, in the same body of work.
Max Rivera: So the honest answer is: the reform is necessary, the calendar fix alone is theater, comp design is more surgical — and whether any of it survives contact with the doctrine it's trying to displace is still genuinely open.
Clara Bennett: The part that stays with me is this: stock prices respond to beat-or-miss on a quarterly cycle, but the strategic damage from cutting discretionary spending compounds over years — and it's invisible while it's happening. That asymmetry is doing the real work. And I'm not sure any reform touches it cleanly.
Max Rivera: Yeah. And — I mean, underneath all of this is whether the incentive misalignment is accidental. Or whether this is exactly how capital markets designed it to work in the eighties and nineties when stock-based comp became the whole game. Because if it's the latter, then the SEC reporting cadence, better accounting for R&D, patient institutional owners like Baillie Gifford — those are all, I don't know, they're working around the edges of a system that's functioning exactly as built.
Clara Bennett: Maybe that's the point. Capital markets optimizing for what they measure isn't a bug.
Max Rivera: Then we should be honest that what they're measuring and what creates durable value are not the same thing.
Clara Bennett: No — I don't think you're wrong about that.
Max Rivera: That's — yeah. That's probably where I needed to land this whole time and kept talking past it.
Clara Bennett: It was a good argument to have. Thank you for the push.
Max Rivera: Same. Good one.
