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Professor Kay doesn’t like the requirement on companies to give financial updates every quarter, calling the regime a ‘tyranny’
John Kay was providing only an update on evidence given to his inquiry, rather a list of prescriptions on how to improve the functioning of the UK equity market, but he seems to have made up his mind on one point. The professor doesn’t like the requirement on companies to give financial updates every quarter. He calls the regime a “tyranny.”
He’s right. There’s no need for a blizzard of statistics every three months. Once upon a time, everybody knew not to trust a company that displayed its real-time share price on an electronic board in the lobby of its corporate HQ. It was a tell-tale sign that the executives were spending too much time watching the market’s short-term assessment of the company’s worth; that time would be better spent trying to create some long-term value.
Quarterly reporting, however, has encouraged scoreboard-watching, both by corporate executives and fund managers, who generally also have to give three-monthly updates on their own performance.
There’s an interesting paragraph in Kay’s report in which he reveals the view of Sir Terry Leahy. The former boss of Tesco said the quality of engagement with City analysts and fund managers had declined during his time at the top – there was too much concentration on quarterly numbers and earnings guidance and too little on the strategic direction of a business.
Tesco shareholders may look ruefully on those comments given recent troubles (did the supermarket chain strain too hard to keep up City expectations?) but Leahy’s point seems unarguable: if everybody is obsessed by the next trading update, it’s harder for owners and executives to talk about how to improve profits in five years’ time.
The argument in favour of quarterly reporting says shareholders are grown-ups, or should be, and thus are perfectly capable of judging for themselves what financial information counts as truly important. Well, yes, but it’s the cultural effect on companies’ decision-making that’s the worry. It has become increasingly hard for managements to sell a story of long-term investment at the expense of short-pain in, say, cash flow. Share buy-backs rule; five-year investment projects don’t.
There are many other causes of short-termism. For example: absurd incentive plans for executives and fund managers; a tax system that encourages financial leverage; and high-frequency trading. But the quarterly reporting system seems one of the easier problems to fix. Just ditch it.