Has the time come to put an end to quarterly reporting? Sound investment decisions depend upon access to timely and accurate business information, both financial and non-financial. However, many are of the view that reporting cycles designed to serve the apparent needs of investors and other key stakeholders may hinder effective business and operational decision-making, and thus actually diminish shareholder value rather than enhance it.
On one hand, markets and regulators desire ever more reliable, credible, and transparent information. On the other, many businesses believe they are being unnecessarily burdened. Some feel that the costs of compliance and reporting are rising without obvious economic benefit, and it would be preferable to invest their resources in product and service innovation, in seeking out new opportunities, and in value-added activities instead.
As argued by Legal & General Investment Management (LGIM) in its 2015 annual governance report, quarterly reports do provide an opportunity for management to update their broader investor base and manage their expectations, but they come at a cost in terms of resources and can also potentially impact strategic decisions. LGIM contends that most business managers would agree that it takes at least three to five years for meaningful change to occur in companies. In some businesses, particularly research and development-led sectors, decisions taken today might only come to fruition in 10-20 years’ time.
The 2012 Kay Review commissioned by the government to explore how well equity markets were achieving their core purposes: to enhance the performance of UK companies and to enable savers to benefit from the activity of these businesses through returns to direct and indirect ownership of shares in UK companies, returned nine core proposals. Amongst them was the following: “Reduce the pressures for short-term decision making that arise from excessively frequent reporting of financial and investment performance (including quarterly reporting by companies), and from excessive reliance on particular metrics and models for measuring performance, assessing risk and valuing assets.”
Also in 2012, the Generation Foundation published Sustainable Capitalism, which identifies five actions including ending the default practice of issuing quarterly earnings guidance.
A 2013 report it commissioned Building A Long-Term Shareholder Base: Assessing The Potential Of Loyalty-Driven Securities, building on this earlier work, recommended “abandoning quarterly reporting given its potentially adverse effects on both companies and investors”.
In 2013, the European Union altered the Transparency Directive for listed companies by removing the mandatory requirement for interim management statements. The UK’s Financial Conduct Authority (FCA) subsequently implemented the change and the regulatory requirements were officially amended on 7 November 2014.
However, since then, only a small number of companies (Diageo, United Utilities, National Grid and G4S) have stated their intention to drop their quarterly reports.
Reasons cited for why so few businesses have, as of yet, dropped quarterly reporting include:
- It suits some industries (e.g. in retail, investors want to know how each season of clothing performed)
- It is still a legal requirement in other countries for global firms (e.g. in the US)
- Businesses are used to the status quo, reluctant to change, and fearful of litigation
- Investors have not called for new approaches to reporting in unison
- Some analytical models rely on quarterly numbers
- It is reinforced by cyclicality, global competition for capital and the preferences of shareholders overseas
While acknowledging that removing quarterly reports and moving to semi-annual updates would not be a panacea in creating a more long-term investment environment, LGIM is nonetheless confident that asking companies for long-term business growth and expecting them to meet consensus targets every quarter is contradictory, and possibly counter-productive. As a result, in 2015 it decided to lend its support to companies considering discontinuing their quarterly reports by writing directly to the chairs of all the FTSE 350 companies.
In these letters, LGIM reiterated that the decision on reporting frequency lies with the board, which should base its decision on the nature of its business and its investor base. It made clear its preference, however, was for less communication on short-term achievements and more articulation of business strategies, market dynamics and innovation drivers.
The same rationales apply to disclosure of data relating to sustainability. Sustainability reporting requires that an organisation understands how it impacts on its stakeholders, and ways in which it might mitigate negative impacts on the economy, society and the environment. Similarly, integrated reporting emphasises the inclusion of forward-looking information to allow stakeholders to make a more informed assessment of the future value creation ability of the organisation. Integrated reporting aims to combine and integrate the financial and non-financial data businesses measure, use and report on. Sustainability and integrated reporting by their very nature require businesses to consider, plan for, work towards and articulate longer term strategic issues.