As another year of the reporting season comes to an end many IR professionals will likely be reflecting on what they have achieved. For others, the next quarter’s disclosure will already be in mind. But reporting is a time consuming process, is it really the best use of company time?
With this in mind, the Investment Association (IA) – a representative body for UK investment managers - recently called for the end to quarterly reporting from FTSE 100 companies, suggesting that boards should move away from disclosing three-monthly numbers to focus more on their longer-term strategic goals. However, even with the backing of the Chancellor in this year’s Budget Statement, is the shift really as simple as ‘long-termism’ is good and short-termism less so?
The recommendation made by the IA is part of an eight-month project aimed at increasing productivity from the UK’s largest companies. The intention is to change the focus away from those traditionally examined in reports and onto a larger set of variables and how they link to long-term performance.
Since 2014, listed companies have not been required to report quarterly but voluntarily have continued to do so. However, with new research suggesting that quarterly reporting is a “distraction” from longer-term goals, several companies such as Legal & General, have begun to stop. Nigel Wilson, L&G’s chief executive, suggested that the decision would help management to make “the right long-term decision in the interest of all our stakeholders."
The sentiment reflected here is that reporting which focusses on short-term performance is not correlated with creating a sustainable business and that future business drivers will be forgotten. This is not necessarily a bad idea; it is possible to argue that if the finance industry had not been so focused on short-term targets then the effects of the 2008 downturn may not have been quite so severe.
However, are the assumptions from the IA about the negative effect of quarterly reporting completely valid? What will be lost without these regular updates from a business? There is the thinking that shorter-term updates provide important milestones as to whether interim targets have been reached within a long-term strategy. In our modern society the amount and regularity of business information has increased drastically and with fewer reporting dates there could be a chance that investors will rely more heavily on estimates leading to a larger disruptive effect.
The IA will be releasing an 11-part action plan later in the year and will no doubt reignite the debate over whether short-term reporting is a necessity or a hindrance to a board’s longer-term goals.
At Investis, we think it is up to companies to decide whether quarterly reporting is of benefit to their management strategy. However, from our own work with reports we are acutely aware that they often provide the most detailed explanation of performance, business strategy and internal culture. If companies choose to drop regular reporting, they must ensure that this information is adequately outlined elsewhere on the company website to ensure that stakeholders remain up-to-date and well informed.