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No quarter

17 November 2015 By Rob Cox

Quarterly capitalism has become a four-letter word. From BlackRock boss Larry Fink to American Democratic presidential contender Hillary Clinton, critics of the overweening desire to hit the numbers every three months, common among both investors and managers of publicly traded companies, see a fundamental flaw in today’s system. But words are cheap. For the system to change, significant players have to make the first move. That may happen in the year ahead.

Corporate executives have long railed against the treadmill of reporting their guts out every three months. They say it’s a waste of time, costs money, and is a distraction from the more important tasks of setting strategy and running a business. They moan that it creates unnecessary and unhelpful swings in stock prices and debt funding costs and, most damaging of all, hinders longer-term planning.

Defenders of the practice do not say they need news flow to trade, or that trading is fun and profitable. They talk about transparency. Stock-market investors who have regular glimpses into corporate finances are better placed to judge the progress of strategy, assess the efficacy of management and gauge product cycles. The ultimate investors – widows, retirees, teachers and billionaires – gain from the knowledge.

This logic has led to mandatory quarterly reports for companies with securities regulated by the U.S. Securities and Exchange Commission. For the last three decades, the instinct to tell more, and more frequently, has gone global. Germany’s Deutsche Boerse requires companies to provide detailed statements every quarter. Even where such regularity of reporting is no longer required – as in the United Kingdom since 2014 – it is still the convention.

But the trend may be reversing. This past summer, UK insurer Legal & General’s $1 trillion investment-management arm nudged the debate forward when it wrote a letter to the top 350 companies on the London Stock Exchange urging them to consider dropping quarterly reporting.

“Reducing the time spent on reporting that adds little to the business,” Legal & General Investment Management Chief Executive Mark Zinkula wrote, “can lead to more articulation of business strategies, market dynamics and innovation drivers, which are linked to key metrics that drive business performance and long-term shareholder value.”

While lots of stewards of other peoples’ money agree in principle, in practice many still worry that any company that only gives its investors a look into the sausage factory every six months will be stigmatized in the markets. Classically, this would manifest itself as a valuation discount to peers. It’s worth noting that Legal & General itself still provides interim management statements every quarter.

The world’s largest public fund managers and insurers could help change habits by firmly stepping off the quarterly treadmill, at least where the law currently allows. After all, shareholders set the theoretical transparency discount by deciding what shares to purchase and at what price. Ultimately, these human beings determine valuations.

If the custodians of trillions of dollars of assets decide what’s good for the goose (ending quarterly reporting by the parent) is also good for the gander (the portfolio managers they employ) then other companies in other industries can follow suit. Ten of the largest listed investment managers – including BlackRock, Allianz, State Street and Bank of New York – oversee some $10 trillion of wealth.

There will be resistance. Not every investor buys the argument that quarterly reporting is a bad thing. It may help avoid problems earlier, before they fester – giving shareholders time to get out or press CEOs to fix matters more rapidly. And businesses in technology, retailing, consumer goods and media probably move too swiftly for six-month updates to be sufficient.

The quarterly-financial-industrial complex won’t like a big shift, either. Stock exchanges like Deutsche Boerse and Nasdaq benefit from companies reporting twice as often in a given year, as it bolsters trading volumes and fills their faster-growing “market data” business pipelines.

More frequent corporate dispatches are arguably better for the news and information business, too, including Breakingviews parent Thomson Reuters. It even benefits Warren Buffett, who has often lamented short-termism in the investing world. Berkshire Hathaway owns Business Wire, which would see its volume of earnings reports cut if the world moved to report twice a year.

It will take a brave and big investment manager to get beyond these entrenched interests and sustained effort will be needed to modify rules requiring disclosure four times a year. But if the signals from fund managers with the most at stake are genuine, expect their corporate parents to lead the way in the not so distant future.

This view is a Breakingviews prediction for 2016. Click here to see more predictions.


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