Two very different companies made significant announcements last week. National Grid, the UK utility company, said it would no longer issue formal quarterly reports — an important piece of news for its investors, who took it in their stride. The next day, Apple gave its regular quarterly update. Investors sent the company’s share price soaring after learning that strong holiday sales pushed it to the largest profit of any public company in history.
The investors’ reactions raise two questions. Is the economy better served by frequent corporate reports, or by statements when meaningful events occur? And does the timing of reports contribute to short-term attitudes among investors and corporations?
A similar debate occurred 60 years ago when the US Securities and Exchange Commission first required companies to file half yearly reports. In a 1955 consultation, 68 out of the 70 letters in support of the SEC’s proposal came from investors and the securities industry; 57 of the 63 letters against came from corporations. Executives I spoke to in the City of London last week reflected the views of their 20th-century predecessors. The asset management industry divided between event-driven “volatility” types who feed off news; and longer-term fund managers who see quarterly reporting as a distraction.
For the corporate sector, a cost-benefit analysis of quarterly reporting is inconclusive. There is evidence that a high frequency of reporting lowers the cost of capital but this is offset by the drain on management time. National Grid estimates this to be a month a year.
The alternative to the US requirement for standardised quarterly financial statements is for companies to report significant news. It seems counter-intuitive to reduce news flow in the information age, but is less formulaic and less time consuming, particularly for long-cycle companies such as National Grid. It is a different matter for companies such as Apple in fast-moving, seasonal sectors to give quarterly updates anyway. So allowing listed companies in the UK and Europe to have the option to make quarterly statements seems appropriate. Investors will make their wishes clear on a case-by-case basis.
John Kay’s 2012 review of equity markets for the UK government made the link between quarterly reporting and behaviour. Professor Kay, a Financial Times columnist, believes that quarterly reports influence corporate executives and investors by focusing them on short-term results.
Share price-obsessed chief executives are known to anyone who has worked in the stock market. They show an unhealthy interest in analysts’ opinions; see market-pleasing as a corporate objective; and shape the business and present results accordingly. The quarterly results presentation is just another opportunity to manage the crowd.
But good corporate governance can control this kind of behaviour. A strong board will keep the chief executive focused on strategy and short-term noise from quarterly reports in perspective. On the other hand, irrespective of the reporting cycle, a weak board with a weak chief executive will condone strategies intended to boost the share price. So it is the quality of management and oversight rather than the quarterly reporting requirements that drive the right kind of value-creating behaviour in the corporate sector.
The problem in asset management is more complex. The principal drivers of short-termism in that industry lie in the way fund managers’ performance is measured and mandates are awarded. Consultants who advise fund trustees are frequently accused of paying too much attention to fund managers’ short term performance.
An excessive flow of corporate news contributes to the noise but is not primarily responsible for short-term investing. Solving that problem would require a determined response from fund owners. Of this, there is little sign.
For corporations and asset owners, better governance, not fiddling with reporting requirements, is the answer.