Market Views: Should companies report less frequently?
US President Donald Trump announced on Twitter last week that he had asked the US Securities and Exchanges Commission (SEC) to consider cutting down the frequency of financial results reporting for publicly traded companies.
Since 1934, US-listed companies have had to issue quarterly and annual reports detailing their financial performance to provide investors with the timely information they need to make investment decisions. Firms registered in many other countries do likewise.
However, one advancing critique of this system is that it encourages companies to prioritise short-term results over longer-term investments, where the benefits -- while real -- might take time to accrue. Sacrificing these longer-term gains would then be a negative for longer-term investors.
The flipside is that shifting to a semi-annual reporting schedule would provide investors with less information about how their invested companies are doing, leaving them less-well equipped to make informed investment decisions.
We asked four financial services consultants, an activist investor, and a fund house investment head whether they thought a move from quarterly reporting to semi-annual reporting was a sound idea and what the pros and cons might be.
The following extracts have been edited for brevity and clarity.
David Webb, activist investor (Hong Kong)
It’s negative. There are no pros to removing quarterly reporting, other than a negligible reduction in corporate costs. Internally, management and directors should have management accounts on a monthly basis anyway, so most of the cost is incurred with or without publishing quarterly reports.
Quarterly reporting is information. Reducing information increases uncertainty and increases the information gap between insiders and outsiders, facilitating insider dealing and selective leaking to investors.
It is an urban myth, propagated by management who don't like being accountable for the use of public capital, that quarterly reporting makes management behave in a short-term manner and destroys value through so-called short-termism. If that were true, then US public companies, including those with long-term investment horizons such as pharmaceutical developers or aircraft makers, would have under-performed those in markets which report semi-annually (or even annually). They haven't.
Sandra Peters, head of financial reporting policy group (New York)
We don't agree with moving away from quarterly reporting to semi-annual reporting for a couple of reasons. The principle reason is that we don't buy into the argument that it makes for better long-term decision making because moving from three to six months doesn't really change long-term investment decisions for companies.
..Six months is a long time and a lot can happen in six months with respect to market events. It's leaving a high degree of discretion as to what management decides they're going to comment on that's a material event between these two periods of time.
And it has the potential to [result in] different interactions between investors and the company, for an asymmetrical release of information. Our concern is really that a lot can happen and that it's not necessarily going to be a free flow of information in the market in that period of time. It creates the opportunity for people to trade on an asymmetrical release of information, so we think it's more of a level playing field to do it quarterly.
The principal argument is that [encourages more] long-termism, but we don't really believe that is the case. ... There would be a reduction in the cost of the production of the financial information, but I think investors are willing to pay that cost. And it's an ironic thing to consider that in the world we live in today, with instantaneous information, that the suggestion is that we should reduce the amount of information to investors. That doesn't really fly with the general trend of information that investors have to make decisions.
Eoin Murray, head of investment (London)
Hermes Investment Management
For the first time in my life I found myself in agreement with president Trump ... But as I thought about it, I actually think he's missed the point. There is a problem with short-termism but I don't think that's necessarily got anything to do with companies reporting on a quarterly basis, because all that means ... is that investors have greater transparency into what is going on with companies and that's actually a good thing.
The real problem for me is the nature of executive compensation, such that executives are incentivised to run firms to put a gloss or a spin on their quarterly numbers, instead of acting in the interests of the long-term. I don't think simply going from quarterly to semi-annual reporting changes that [because] you don't deal with the root of the problem, which is around compensation and incentives.
There are some really easy wins with respect to executive compensation and making sure that it's linked to long-term corporate performance, and there's a facility to claw back compensation should subsequent earnings disappoint. I actually think that's something that can be done very simply. Funnily enough, executives might not see it that way and may not wish to make the necessary changes. It's a bit like asking turkeys to vote for Christmas.
So shifting from quarterly to semi-annual reports does not have any major benefits to long-term investors ... It would reduce transparency, which would be disappointing, [and] there are other bigger problems which would tackle the problem far more directly.
Keith Pogson, Senior partner, financial services, Asia-Pacific (Hong Kong)
Eugène Goyne, Executive director, financial services, Asia-Pacific (Hong Kong)
If you have a good governance organisation, they should have a very sophisticated approach to dealing with investors and shareholders anyway. So to ... force them into a given rhythm may or may not be additive to corporate governance.
[Having] good corporate governance would mean ... having processes for communicating with shareholders .. and good mechanisms for dealing with potential problem areas such as price-sensitive information. Just because you have quarterly reporting doesn't stop people having very late profit warnings, or having fairly poor interactions with the market when there are clear differences in their business from where expectations are, and so on. To be honest, sometimes they wait for the quarter to talk about it, whereas good governance would say that if you're aware of it, you should be out there talking about it more quickly anyway.
There are concerns that companies have needed to build a reputation of continued performance on a quarterly basis, which sometimes detracts from the ability to make longer-term investments. If you are really focused on every quarter, you're unwilling to risk that by going out and maybe investing in a bit of innovation. That's really been the criticisms that have been thrown out often around the US reporting system that Trump has obviously come out and commented upon.
The positive has always been transparency. More information is better than less information. Timely information is important, and obviously it's a long time between the announcement of the half-year results and the final year results. There are concerns around data asymmetry, or information asymmetry, so if you are an investment analyst going and making visits to these companies, do you have additional insight that the market doesn't have just because you've been more in touch with the business, and so there's an equality discussion about the frequency of data.
Paul Lau, Partner and head of capital markets (Hong Kong)
From a corporate governance perspective, the argument for keeping quarterly reporting is that it's going to provide more timely information ... This is so [investors] can monitor the performance of listed issuers.