President Trump recently argued for potentially changing the financial reporting frequency for publicly traded companies. The US Securities and Exchange Commission (SEC), which regulates financial reporting in the US, confirmed that it is “prioritizing” the proposal that would replace the current requirement of quarterly reports with half-year reports. Quarterly reports have been required by the SEC since 1970. Critics have been quick to point out that less reporting implies less transparency and thereby greater risk for investors.
At SKAGEN Global, we take a contrarian stance and argue that such criticism is misguided because it overlooks three key investment aspects:
- executives should focus on running the business;
- bureaucracy does not equal transparency; and
- short-term thinking is detrimental to long-term returns.
In this instance, we believe Trump may be onto something good that could have a meaningful positive impact for millions of long-term pension savers across the globe.
Focus on operations, not investors
First, top management should focus on leading the company, not discussing the decimals in quarterly numbers with investors. The amount of time that executives spend each quarter “updating the market” is staggering. On a rolling three-month cycle, they give detailed presentations on the latest financials, attend investor conferences and go on roadshows, often to multiple continents, to discuss the quarterly results in person with existing and prospective shareholders. One can only imagine the time and energy required to repeatedly prepare for and pull off such events, preferably with a smile and their sharp intellect intact. Imagine if this energy was instead channelled into improving company operations! Many of the companies we most admire have management teams dedicated to operations rather than investors. Is it merely coincidental that these businesses tend to outcompete their peers both on the field and in the stock market?
Less is more
Second, the swelling quarterly reporting packages create bureaucracy, not transparency. We do not doubt regulators’ good intentions behind the reporting requirements, but the information overload in today’s digital age has already reached the stage where it arguably does more harm than good as far as transparency is concerned. Add to that the inevitable fluctuations in financials from one quarter to the next due to one-off variables, such as weather events, exchange rates and calendar effects, which further reduce the usefulness of quarterly numbers. In addition, “adjusted” figures suffer from a high degree of management discretion.
With the financial crisis still fresh in people’s minds, business leaders understandably have little appetite to publicly call for less disclosure. However, as long-term investors on the receiving end, we favour a less-is-more approach. Greater transparency does not come simply from more information, but more focus on relevant information.
Long-term focus
Third, a quarterly reporting cycle encourages short-term speculation at the expense of long-term investing. The market’s obsession with how a company’s quarterly figures compare to the issued guidance and big bank analysts’ predictions is unhealthy. The hype and myopia surrounding these quarterly figures give rise to large stock price fluctuations and are likely to distract both companies and investors from the long-term trajectory. More worryingly, it may also discourage companies from making sound long-term investments in order to pump up short-term profits.
Here we side with the value investing legend Warren Buffett and JP Morgan’s chief executive Jamie Dimon who have both suggested that companies drop short-term guidance altogether. Reducing quarterly reporting requirements would facilitate this – a decision that may otherwise be difficult to make given the high external pressure. In summary, quarterly reports create volatility on which short-term traders can profit handsomely but potentially disadvantages pension savers who want their companies to act and invest for the long-term.
Best-in-class structure
What, then, is the solution? We think the US president is on the right track. More specifically, we do not think that the world needs to design a new financial reporting structure. It already exists in the UK where mandatory quarterly earnings reports were scrapped in 2014. Companies listed in the UK provide a complete set of results with management available to answer questions every six months (half-year/full-year). In the other two quarters, most companies choose – but are not required – to publish only a short interim management statement (IMS), essentially a one-page document with select key figures and brief commentary. This reporting structure is not a UK phenomenon. In fact, a semi-annual reporting cycle has been adopted by several other countries such as France, Switzerland and Australia.
We consider this reporting practice to be best-in-class as it effectively addresses each of the three key investment aspects. It limits the time management spends on market communication. It provides adequate transparency while allowing for periodic updates on pertinent business metrics. It eliminates short-term noise and encourages investors and executives to focus on the long-term.
In the end, a more long-term approach by executives and investors is likely to better help pension savers prepare financially for retirement.