In 2020, the SEC issued a 7-page interpretive release providing guidance on disclosure of key performance indicators in MD&A. Among other things, the guidance noted that disclosure of certain key metrics may be required under Item 303, but said that when companies disclose such metrics, they should also consider whether additional disclosures are necessary. The release also highlighted the obligation to maintain appropriate disclosure controls and procedures when disclosing KPI metrics. Since that time, KPI disclosures have proven to be a popular topic for Staff comments – and the occasional enforcement proceeding.
One of the big reasons that KPIs attract a lot of attention from the SEC is that companies love to use them and talk about them – but a recent FEI Daily blog says that they may be overdoing it:
Key Performance Indicators (KPIs) are present at nearly every level of the leading U.S. corporations—from their HR departments, to finance, to marketing, to sales. On paper, KPIs serve a very useful function: they quantify performance over a period of time, giving teams targets to hit, establishing milestones in a company’s journey toward its goals, and providing leaders with insights that can steer the ship toward greater efficiency and profitability.
However, in the age of advanced analytics, where organizations rush to incorporate the latest in analytics into aging infrastructures, companies keep building up their list of KPIs while losing sight of the big picture. Ironically, many companies that try to incorporate more data just end up with more reports that aren’t used and the data itself becomes less useful. Imagine someone intending to knit a sweater but instead starts tunnel visioning on making more and more loops, without connecting them back to the already-woven fabric. The loops become an end in themselves. This is what organizations are doing by over-indexing on KPIs—making the means the focus, not the end. Companies need to think beyond the “loops” to connect with the fabric of the bigger picture.
It strikes me that this is something that companies should keep in mind and consider whether there’s a need to cut through the KPI underbrush to determine what performance metrics should be disclosed in SEC filings & investor communications. That’s going to require sorting out the KPIs that really matter from the ones that are less relevant or even potentially misleading.
One of the SEC’s objectives in issuing its KPI release was to encourage companies to make their MD&A disclosure more transparent. But if you’ve got a bunch of random, non-key KPIs working their way through the company, that’s a recipe for the opposite of transparency – muddy & potentially problematic disclosure in your SEC filings.
– John Jenkins