“Time is the friend of the wonderful business, the enemy of the mediocre.” Warren Buffett
Nearly every investor purports to be in it for the long haul, like the Sage of Omaha. And, as such, it is easy to grow annoyed with commentators and those investors fixated on short-term returns. Now, one influential advisor is raising a bold suggestion to combat such short-termism: eliminate quarterly reporting.
Martin Lipton, founding partner of Wachtell, Lipton, Rosen & Katz, has long been considered one of the deans of the corporate law bar. Now, in a memorandum excerpted at the Harvard Law School Forum on Corporate Governance and Financial Regulation website, Lipton and co-author Sabastian V. Niles set forth their position that the SEC should follow the U.K.’s lead in abandoning quarterly reporting requirements.
In late 2014, U.K. regulators ceased mandating quarterly reporting for companies, commenting that: “rigid quarterly reporting requirements can promote an excessively short-term focus by companies, investors and market intermediaries and impose unnecessary regulatory burdens on companies, without providing useful or meaningful information for investors.” Echoing those concerns, Legal & General Investment Management Ltd., a European asset manager with over £700 billion in total assets under management, recently wrote to the boards of the 350 largest companies on the London Stock Exchange urging an end to quarterly reporting. In its letter, Legal and General decried expensive and time-consuming quarterly reporting as focused “on short-term performance … not necessarily conductive to building a sustainable business.”
Impressed with these developments, Lipton suggests that the U.S. should follow suit:
“While U.S. companies do not, as of yet, have the option of discontinuing quarterly reporting (though they do have discretion to decline giving quarterly earnings guidance), the SEC should keep these observations in mind in pursuing disclosure reform initiatives and otherwise acting to promote, rather than undermine, the ability of companies to pursue long-term strategies.”
There is no doubt that short-term thinking has resulted in some questionable practices, such as companies cutting back on R&D in favor of stock repurchases. And as a result, Lipton and Legal & General are not the only voices speaking out. Earlier this year, Laurence D. Fink, chief executive of BlackRock, sent a letter to CEOs of 500 of the nation’s largest companies criticizing dividends and stock buy-backs, stating: “[T]he effects of the short-termist phenomenon are troubling both to those seeking to save for long-term goals such as retirement and for our broader economy.” Then, last month presidential-hopeful Hillary Clinton pledged reforms to “help CEOs and shareholders alike to focus on the next decade rather than just the next day.”
But even if you favor long-term strategic thinking, is eliminating quarterly reporting the answer? For many, the answer is a resounding “no”. Financial journalist Herb Greenberg of Pacific Square Research called the proposal “the stupidest thing [he’s] ever heard,” urging that eliminating quarterly guidance, not quarterly reporting would better serve long term investors. Hilary Eastman, PwC’s Director of Investor Engagement, commented: “Getting rid of quarterly reports might free up time for now – but it’s not a long-term solution and treats the symptom rather than the cause. Better, not necessarily less, information should be the goal.”
We agree that better information and transparency is the answer. While short-termism is a concern, eliminating quarterly reporting is not the solution. Quarterly reporting provides investors with a timely and reoccurring snap shot of a company’s finances and condition. This information leads to more informed investors, and provides a regular opportunity for companies to engage with investors and analysts. Eliminating quarterly reporting will not only leave investors in the dark for long periods of time, but fails to address core issues with short-termism, such as the myopic focus on meeting earnings forecasts. A better approach is for companies to continue to report their actual financial results, but limit their guidance on prospective revenues and earnings. Time and time again we have seen companies become so fixated on meeting their projections that management resorts to a number of gimmicks to inflate their financials, from delaying expenses to back-dating revenue. But abandoning the core principle of transparency is not the answer.