Three Reforms to Encourage Patient Capital

Michael Dell and his investors spent twenty-five billion dollars to buy back Dell Technologies. But they weren't really buying a company. They were buying freedom from quarterly earnings pressure.

I'm Phil McKinney, former CTO of Hewlett-Packard, and I witnessed how this pressure shaped decisions for years. Today, we are exploring why the WSJ's recent defense of quarterly reporting misses what actually happens inside corporate boardrooms.

The Reality of Quarterly Pressure

I want to show you what quarterly reporting actually looks like from the inside.

Let me paint you a picture. It's week seven of the quarter, and you're in a conference room with your executive team. On the screen are two critical numbers – your revenue projection and Wall Street's expectations. They don't align.

During my time as CTO at HP, I found myself in these situations repeatedly. R&D projects worth billions in the future would get paused. Innovation initiatives that could transform the company would get delayed.

Not because they lacked value. But because we had weeks to hit the quarterly numbers.

What struck me was how predictable this became. Quarter-end approaches? Cut the long-term stuff. Meet short-term targets. Rinse and repeat.

When your stock price swings ten percent over missing earnings by three cents per share, you optimize for quarterly performance, even when it destroys long-term competitiveness.

Now, this is where it gets interesting. One CEO escaped this system entirely.

The Dell Example: Twenty-Five Billion Dollar Proof

Here's the proof that this system is broken.

Michael Dell and Silver Lake paid $ 24.9 billion for one thing: freedom from quarterly earnings pressure, killing Dell's long-term potential.

Dell's explicit goal: “No more pulling R&D and growth investments to make in-quarter numbers.”

What happened next was remarkable. R&D spending jumped from just over one billion to over four billion dollars. That's a 400 percent increase. Dell transformed from a declining PC manufacturer to an enterprise solutions leader.

The return on investment by 2023? Seventy billion dollars.

What Dell did wasn't just a corporate restructuring. It was a twenty-five billion dollar bet that quarterly reporting destroys long-term value. And they were proven spectacularly right.

If you've experienced similar pressure at your company, I'd love to hear about it in the comments.

Why the WSJ Analysis Falls Apart

So with examples like Dell showing the impact, why does the WSJ still support quarterly reporting?

The WSJ points to the UK's optional move from quarterly to semi-annual reporting and notes that companies didn't dramatically change behavior. Their conclusion: quarterly reporting isn't the real problem.

That reasoning ignores a fundamental truth. We've trained an entire generation to think in ninety-day cycles. Business schools teach earnings management. Compensation rewards quarterly performance. Analysts' careers depend on short-term predictions. Journalists need something to write about, like quarterly results. 

You don't undo decades of this quarterly mindset simply by making reporting optional. The UK comparison is meaningless without addressing the ecosystem that reinforces short-term thinking.

The Big Tech Illusion

The WSJ claims Big Tech's AI investments prove quarterly reporting doesn't hinder long-term thinking.

The argument misses the point completely. Google, Microsoft, and Meta can hide enormous R&D in their massive profit margins.

When you're generating margins of twenty to thirty percent on hundreds of billions in revenue? You can invest billions in moonshots while still beating quarterly expectations.

But what about manufacturing companies with five percent margins? Healthcare companies fighting regulations? Emerging tech businesses that can't disguise innovation investments?

The current system creates a two-tiered economy. Only the most profitable companies can think long term. Everyone else gets trapped in quarterly optimization cycles.

And that's precisely why this threatens America's competitive future.

What's Really at Stake

America's competitive advantage came from patient, long-term investments in breakthrough technologies. Semiconductors, the internet, biotechnology – all required decades of sustained investment.

Today's quarterly regime systematically discourages ‌”patient innovation”.

I call it the “fifty-year overnight success” – transformative innovations need sustained investment over decades. Try explaining that to analysts who want to know why margins dropped two percent.

While we optimize for quarters, competitors in China make decade-long investments in critical technologies. We're giving away our innovation advantage.

Three Real Solutions

Switching to semi-annual reporting solves nothing. Six months isn't different from three months for long-term thinking.

Three reforms could actually move the needle:

First – eliminate forward-looking earnings guidance. This forces public commitments about future performance, creating pressure to hit predictions regardless of better opportunities.

Second – separate long-term innovation investments from operational expenses in accounting. Give investors visibility into both current performance and future potential.

Third – create metrics and incentives that reward patient capital deployment, not just quarterly performance.

The Bottom Line

The stakes aren't an abstract policy debate. It's about America's economic future.

Academic research provides a valuable perspective, but there's often a gap between theory and practice when it comes to corporate decision-making under pressure.

In my experience, there's often a significant gap between how these systems work in theory versus practice. The quarterly reporting system creates pressures that can undermine long-term thinking, even when that's not the intention.

Next time the Wall Street Journal analyzes corporate behavior, here's an idea: talk to someone who's actually lived it.

If these insights were useful to you, I'd appreciate your support through a like or subscription.

I'm curious about your experiences with this. Have you seen quarterly pressure affect decision-making at your company? What changes would make the most difference?

For more perspectives on innovation and corporate strategy, you can find it here. I've also written a full op-ed rebuttal to the WSJ article on my Substack publication Studio Notes.

To learn why the WSJ got quarterly reporting wrong, listen to this week's show: The WSJ Got Quarterly Reporting Wrong.

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