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Is quarterly reporting really stopping CEOs doing their job?

Short-termism is built into the equity markets, but institutional investors have had enough.

by Adam Gale
Last Updated: 22 Apr 2016

In the interests of transparency, I should make this clear: business journalists like quarterly reporting. Every three months, most listed firms reveal a treasure trove of information that very often they’d rather not. On a purely voyeuristic level, it’s interesting. But that doesn’t mean it’s good for the business or the wider economy.

The Investment Association (IA) isn’t a fan. The ‘trade body’ for institutional investors is to unveil a major report aimed at cleaning up the UK’s equity markets this week and according to the Telegraph this will include a call to end quarterly financial reporting. It isn’t the first to make such a call, but it might be the last. The IA’s members have some serious clout – and own around a third of the shares in the FTSE 100.

The argument against quarterly reporting makes it sound like a no brainer. It goes like this:

- Quarterly reporting leads to short-termism.

- Short-termism diverts money from capital investment into dividends and share buybacks, and – in the words of economist John Kay, whose 2012 review recommended an end to mandatory quarterly reporting, which subsequently happened – causes ‘hyperactive behaviour by executives whose corporate strategy focuses on restructuring, financial re-engineering or mergers and acquisitions at the expense of developing the fundamental operational capabilities of the business’. (Sound like anyone you know?)

- Under-investment and myopic CEOs cause lower productivity growth, which ultimately makes us all worse off.  

The second and third parts are sound, but the argument stumbles a little at the beginning. Quarterly reporting does not necessarily lead to short-termism in the board room. Yes, regular updates can be misleading – think how many try to bury their statutory results beneath a thick layer of adjustments designed to show underlying performance. Seasonal impacts, currency fluctuations and lost contracts all distort the big picture. 

But that’s only misleading if investors are ill-informed and prone to panic. Too often, indeed, that seems to be the case, given how drastically the share price can swing on a surprising morsel of news. Individually, of course, traders are smart people, second, third or fourth guessing how the markets will react to information in order to make a profit. But collectively, they behave like a pack of lemmings on Red Bull.

And therein lies the real problem. Short-term investors will bring volatility to the share price no matter how often a company reports specified financial data, only they might do it based on hearsay instead, if they don’t have access to the charts. It’s this volatility, and the power of shareholders who treat investment like gambling, that forces chief executives to think in the short term.      

The solution to this problem is essentially what Kay recommended four years ago – more engagement between institutional investors and boards on long term strategy, in part through higher quality narrative reporting and more regular ad hoc updates. Such a change isn’t really something that can be imposed by regulation, however. It requires concerted action by institutional investors not to give in to the mentality of the day trader, possibly by concentrating their investments so they have a stronger voice.

Eliminating quarterly reporting is, on its own, not going to bring about a serious cultural shift in Britain’s board rooms. It might help if it takes fuel away from day traders’ speculation, but for CEOs to have the freedom to look at the big picture, what they really need is to get their big investors on board for the long haul. Let’s just hope they invite the odd reporter to the party too.

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