Quarterly Earnings, Short And Long-Termism: A Fine Line
If quarterly earnings lead to short-termism, what is the guarantee that a semi-annual or annual schedule would change that?
The debate whether corporate earnings should be reported quarterly, is back on the street.
Proponents of the idea against quarterly reporting cite a reduction in compliance cost apart from saving in energy or effort in short-term planning and reporting as immediate gains. More importantly, the discontinuation of quarterly reporting would help companies to move away from short-term focus which can, at times, harm long-term goals such as the spend on research and development, investment in future technology, etc.
While contemplating a move to a new schedule of reporting, there is a need to consider the consequences of ‘losing’ information, made available by regulatory compulsions of quarterly reporting.
This proposal comes at a time when, the world over, investors’ access to verified information has already been drastically reduced. While the securities market regulators attempt to tighten the governance over the verified price-sensitive information; market speculation and media chatter abound.
Social media and the like make unverified information dissemination possible with the click of a button. This makes the availability of verified information even more crucial for the investing world.
Quarterly reporting provides an opportunity for the companies to do so. Especially in India, where the majority shareholder (the promoter) often controls the management, quarterly reports bring in trust and assure the meaningful minority shareholders that their capital is spent for generating value. Further, a more regular reporting minimises the chances of surprising the investors with unexpected developments.
If quarterly earnings do lead to short-termism, what is the guarantee that a semi-annual or annual schedule would change that?
Will form and frequency of reporting ensure transparency and good governance? The central issue of short-termism does not depend on the timelines but revolves around the following:
1. Contents Of The Report
Earnings season is noisy not only due to the financial information disclosed in the report, but also the communication around estimates and guidance which fuels short-term investors. This leads to a temptation to work only towards the next set of numbers. The need, therefore, is to trigger a more mature dialogue with stakeholders. Communication should be around devising long-term strategic plans and setting goals to achieve these operational and value-creation measures rather than the next quarterly estimates.
2. Investors’ ‘Duration-Risk’ Appetite
Duration-risk can be defined as the time threshold an investors’ portfolio will be exposed to an investment without any information around it. For example, in banking and insurance where a single systemic event can lead to sectoral headwinds, the duration-risk appetite is usually small. On the other side is emerging technology companies, where investors often tolerate plenty of risk for an extended period of time. In the case of projects or the engineering, procurement, and construction industry, the duration-risk appetite is higher as compared to that in banking and insurance as annual results are not a linear function of quarterly earnings. Typically in project/engineering, procurement and construction companies, the financial outcome would require assessment over the project life cycle and not within a shorter time window such as 90 days.
Thus, a blanket move to a semi-annual/annual reporting schedule, across sectors, will not balance out the short-termism bogeyman and information disparity among investors.
Perhaps there is a case for a sectoral approach to the issue of quarterly reporting. To keep things simple, there can be an initial effort to categorise the sectors which would require quarterly, half yearly and annual reporting. Another dimension to this matter is the extent of holding by minority interest – anything less than say 25 percent holding by minority interest, within three years of listing, can be provided a longer window between two reporting periods. The dispensation for a lower frequency of reporting can also be linked to the governance rating of an entity or a combination of these.
Any change to the present structure would be sustainable only if driven by trust between the companies, market participants, and regulators. Responsible conduct and commitment to highest standards of governance would have to be non-negotiable aspects of the treaty for change. If the market listed entities can underwrite these, changes could be desirable and swift.
R Shankar Raman is the Chief Financial Officer of Larsen & Toubro.
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.