Wall Street law firm says quarterly reports encourage short-term thinking
US law firm Wachtell Lipton, one of the best known on Wall Street, is calling for the elimination of quarterly reporting requirements in the US, saying the move would encourage longer-term thinking among investors and corporate managers.
In a post on the Harvard Law School forum on corporate governance and financial regulation, company co-founder Martin Lipton cites studies in Europe by Legal & General Investment Management (LGIM) and others that may show quarterly reports persuade managers to focus on short-term goals at the expense of planning for the longer term.
‘These sentiments expressed by Legal & General – coupled with the strong views on broader topics expressed by BlackRock, Vanguard, State Street and other institutional investors targeting the US market – are a welcome reminder we may still achieve a capitalism in which long-term, responsible investors champion boards and management teams that resist pressures to maximize short-term stock prices at the expense of sustainable long-term investment and wealth creation,’ Lipton writes.
He also cites the results of the government-commissioned report in the UK by John Kay; it concludes that quarterly earnings reporting provides little or no value to investors and imposes unnecessary burdens on companies. Quarterly earnings requirements were scrapped in the UK last year, based partly on the conclusions of Kay’s report. In June this year LGIM wrote letters to members of the FTSE 350 to ask them to consider halting quarterly reporting.
Lipton similarly calls on the SEC to consider eliminating or easing quarterly reporting requirements for companies in the US.
‘While US 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,’ Lipton writes.