With deregulation afoot across the business and economic landscape, it should come as no surprise that the SEC has been directed to study loosening quarterly financial reporting requirements. At the heart of the request is a common CEO lament: short-term reporting requirements cater needlessly to short-term investor interests and serve as a costly distraction from management’s primary task of focusing on long-term value creation.
For investor relations professionals and advisers, it’s hard to disagree that the quarterly process is tedious. But be careful what you wish for: reducing timely reporting requirements could seriously impact the quality of investor relations by impairing the ability of companies to manage their message, while also disrupting a common ground that benefits companies and investors and underpins confidence in our markets.
On the surface, the idea seems logical enough. Quarterly reporting is costly and time-consuming. A lot more work goes into it than most will ever realize, starting before the IPO as finance teams and well-paid advisers design and practice the ritual and fret over selecting the right KPIs to be reported to investors. Then in the public world, the process of crafting the message, preparing for questions, ensuring consistency in reporting, keeping your CEO on message (and away from Twitter…) and so on requires thoughtful preparation, especially when business isn’t going so well.
Complaints about the inherent short-term nature of quarterly reports also have some merit on the surface. The quarterly cycle creates pressure to make decisions that may sate near-term investor demands but can later backfire. In our experience, however, these decisions are more often than not about protecting the stock price and/or an unwillingness to swallow tough medicine.
In the end, while some executives deride the quarterly ritual as distracting and inviting unwanted scrutiny and costs, most CFOs will tell you it also enforces discipline, helps assure better financial controls and affords more rigorous and timely insight into business trends and indicators. Not to mention that the process is a fair price to pay for ready access to the capital markets.
And that’s where investor communications comes in. Two guiding truths: markets move on new information, and material information must be disclosed fully and fairly. Companies strive to maintain control of the information they deliver and how they deliver it, while investment funds on the receiving end of that information have their own bosses to answer to at least every three months.
Within this framework, the quarterly earnings report provides both parties with a timely common ground that allows for companies to set a refreshed messaging benchmark, which they leverage throughout their post-quarter interactions with investors at conferences and on road trips. These meetings are where many institutions make buying decisions, so thoughtful discourse and precise disclosure are critical to both management and the Street.
A six-month reporting cycle may reduce cost and CEO agita, but the trade-off harms the investor relations process and may well make our markets less efficient. Consider:
- Numbers become stale in six months, making it difficult for investors to learn of key trends affecting a business. On the company side, disclosure discipline can easily wane, leading to faulty reporting and potentially a deterioration in investor trust. Management credibility – often cited by long-term investors as a key criterion for supporting a stock – would be more difficult to judge, undermining confidence
- Because investment funds report to their investors at least quarterly if not more frequently, the long-term/short-term gulf would widen. Investors can’t afford to sit idly and wait six months for the next earnings report; instead, they’ll dive deeper for alternative information sources. Short-sellers will also have wider berth to advance their bear thesis on a given stock, with companies having less ammunition to fight negative memes in a market where perception can change at lightning speed
- Finally, it’s no accident that the impetus for revisiting quarterly reporting came from CEOs of some of our largest companies. A Dow 30 company knows little of the challenges faced by a small or mid-cap company with less predictable performance and fewer market experts who understand its story. A lot can happen to a smaller business in six months: macro dynamics can have disproportionate impact, strategies can go off track and crises can roil companies in myriad ways. Material developments would still be disclosed, of course, but without the context of current financial information, companies could have wider latitude in deciding what’s material. The result is likely to be greater share price volatility.
In short, many companies forgoing a quarterly platform will lose airtime with investors, have more difficulty managing perception and be faced with a tougher path to building an informed and stable institutional investor base. These pursuits underpin most investor relations platforms, and the burden will fall on practitioners to bridge what would be a much wider gap between markets and public companies.
Of course, a rule change might ultimately be much ado about nothing. Many European companies continue reporting quarterly despite not being required to do so. Some report less information in the off quarters, but a number go all in, perhaps recognizing they’re being evaluated by global investors against US companies. This illustrates another truth – our markets are the best in the world because investors can trust them.
The three-month reporting requirement works because it’s a common ground on which the often-obscure process of IR fulfills its critical function in the markets. It enables companies to retain control of their narrative, investors to answer to their bosses and our markets to operate with the efficiency that makes them the best in the world.
Jeff Majtyka is founder and president of IR and strategic communications firm Ellipsis