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Jul 22, 2013

Transparency the best policy?

Opinion is divided on the revised EU Transparency Directive

In an era when public firms have grown accustomed to ever-increasing levels of regulation, the announcement that the European Union’s (EU) Transparency Directive will dial back on quarterly reporting requirements for public companies out of a desire to discourage ‘short-termism’ is good news indeed.

‘Most European companies, and certainly UK firms, will welcome this,’ says Emma Burdett, a partner and head of IR at London-based Maitland and chair of the policy committee for the UK’s IR Society. She points out that few UK firms currently provide full quarterly reports, opting instead for an interim management statement (IMS). But she predicts that some public companies may jettison even this type of disclosure.

Adrian Rusling, partner at Phoenix-IR in Brussels, also anticipates that ‘most companies will be relieved’ at the EU’s revised stance on quarterly reporting, highlighting the positive cost implications of no longer being compelled to report quarterly. And Kay Bommer, managing director of DIRK, the German IR society, applauds the reversal, too – but for a more philosophical reason. ‘We believe regulation is not the right way to handle capital markets,’ he explains. ‘As an association, however, we will still recommend quarterly reports.’

Can companies really report less?

Even without the revised Transparency Directive, some companies have recently reconsidered their quarterly reporting practices. Earlier this year, UK hotel group IHG ceased publishing full quarterly reports, opting instead to furnish preliminary and interim results. UK retailer Halfords announced a similar change in May: instead of publishing separate second and fourth quarter releases, it is including this information in the company’s preliminary and interim results, explains Craig Marks, head of IR.

‘It wasn’t adding any value to have those statements so close to the prelims and interims,’ he explains, noting that the additional reporting obligations took up considerable management time. He interprets the fact that Halfords got ‘no feedback whatsoever’ on the change as a good sign.

Others say the new Transparency Directive is unlikely to influence their reporting practices. Chris Welton, senior vice president of IR at Vinci, plans to continue reporting earnings semi-annually, a popular option in France. He nonetheless applauds the regulatory change, maintaining that if fewer peers are reporting quarterly, his firm won’t be punished when others in his sector post disappointing results. ‘It might get rid of some of the noise in the market that happens quarterly,’ he says.

How companies react will likely depend on the standards within their national markets, notes Patrick Kiss, head of IR and public relations at Deutsche EuroShop in Hamburg. He believes most German companies aspiring to top-tier status will need to continue to meet the prime standard requirements dictated by the Frankfurt Stock Exchange for inclusion in the DAX and other indices. ‘I expect most firms will continue with quarterly reporting if they want to be transparent,’ he says.

Kiss is also skeptical of the argument that quarterly earnings reports confuse investors, encouraging them to focus too intently on the short term. ‘Even in complicated industries, I believe investors are smart enough to understand what it means to have volatility within the quarters,’ he says.

He points out that in Germany and other non-English-speaking countries the workload associated with quarterly earnings announcements doesn’t end with the original release. Companies are also obliged to publish material announcements throughout Europe, which means translating documents into English.

Another challenge is that many countries haven’t clarified what information should be provided in quarterly communiqués. In the UK, for instance, ‘it was always slightly woolly about what exactly had to be included in the IMS,’ says Burdett. ‘It was often a two to three-page document giving an update on financials, particularly the debt position and significant events for the firm in that quarter.’

John Dawson, head of IR at London-based National Grid and chair of the IR Society, appreciates the greater flexibility companies will have under the new Transparency Directive. ‘Many of our members tell us they are likely to continue with up to four trading updates per year because it is helpful in enhancing openness and trust,’ he says. ‘All too often, companies that don’t provide clarity with regular market updates are accused of selective briefing. But much can be simplified and reporting timetables can be more flexible, so many companies will welcome the opportunity of a less prescriptive approach.’

No one-size-fits-all communications

Whether a company decides to continue producing quarterly updates may depend upon its sector. Burdett points out that infrastructure companies or others with gradually changing fortunes usually don’t see much value in communicating on a three-monthly basis. On the other hand, fast-moving sectors like consumer goods typically want to keep the market up to date more regularly.

Size is another factor. For small companies, the expense and management time consumed in generating quarterly reports are far more onerous than for their larger counterparts. ‘An SAP, Daimler or Volkswagen will continue to do quarterly reporting,’ predicts Bommer. ‘But we have small companies with a lot of regulatory requirements that are not necessarily that useful to their investor base. If smaller companies want to report half-yearly only, that’s fine.’

Bommer also praises the EU’s decision because it may encourage firms that have yet to go public to take the plunge. ‘There are a lot of companies that would love to go public but are worried about the requirements,’ he points out. ‘If you lower the requirements, they are more inclined to go public.’

More than anything, changes to quarterly reporting requirements under the EU Transparency Directive might prove a referendum on the influence of the US, as UK economist and author John Kay jokingly suggests. ‘The really interesting question is: to what extent is it an American world?’ he asks. ‘Companies with US listings and US shareholders will go on doing quarterly reporting, but the symbolism is quite important. We don’t think the quarterly earnings cycle and guidance are helpful to either companies or investors. It’s also a retreat from the idea that whatever the problem, the answer is more information disclosure.’

Kay is troubled by the trend for US companies to wait for the quarterly earnings report to make important announcements, while many of their UK peers notify investors of material events immediately. Without a quarterly obligation, he hopes European companies will feel even freer ‘to disclose information on a more flexible, ad hoc basis.’

Long-term effects

At the moment, predicting who will continue to embrace quarterly earnings announcements is mere speculation. Bommer anticipates it will take two years for the Transparency Directive to be made into regulation, and additional time for each country to translate the directive into national law. ‘If the whole process is done in two years, I’ll be surprised,’ he says.

Finally, IROs are wondering whether the EU’s move will have the desired effect of correcting a creeping short-termism on the part of global investors. For now, the jury is out. Burdett believes the move is a step in the right direction, but eliminating the requirement for quarterly reporting won’t single-handedly create a longer-term focus. ‘There will always be short-term investors in the market. This is a positive step but it won’t stop that,’ she says.

In the end, wiping out short-termism may be too ambitious a goal. Bommer is convinced the new Transparency Directive will have served its purpose if it just spurs IROs to speak with investors about their true information desires. ‘If you listen to your investors and analysts and they say, We want quarterly reporting, then you’d better do it,’ says Bommer. ‘If they say, We don’t care, then save the money. It’s all about two-way communication. The hook needs to be tasty for the fish, not for the fisherman – and definitely not for the regulator giving out the fishing permits.’