President Trump recently hinted at potentially changing the financial reporting frequency for publicly traded companies. After consulting with business leaders, he suggested on Twitter that the US Securities and Exchange Commission look into replacing the current requirement of quarterly reports with half-year reports. 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 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 3-month cycle, executives 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 were instead channelled into improving company operations! Many of the companies we admire the most have a management team dedicated to operations rather than investors. Is it merely coincidental that these companies 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. Higher transparency does not come simply from more information, it comes from more focus on the relevant information.
Third, a quarterly reporting cycle incites 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 recently suggested that companies drop short-term guidance altogether. Reducing quarterly reporting requirements would encourage companies to discontinue quarterly guidance – 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 hardly benefits pension savers who want their companies to act and invest for the long-term.
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.
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.
Statements reflect the writer's viewpoint at a given time, and this viewpoint may be changed without notice. This article should not be perceived as an offer or recommendation to buy or sell financial instruments. SKAGEN AS does not assume responsibility for direct or indirect loss or expenses incurred through use or understanding of this article. Employees of SKAGEN AS may be owners of securities issued by companies that are either referred to in this article or are part of a fund's portfolio.