Is Ditching Quarterly Reports the Short-termism Answer?

A Presidential tweet recently ignited another conversation about a long-term focus in public equity markets.  As grand calls for change abound, what practical steps can directors and public company leaders take in the near-term to find practical ways to embrace long-termism?  In a column for Directors & Boards Abernathy MacGregor’s Pat Tucker offers perspective on the debate over quarterly reporting and advice for creating a long-term focused culture now.

The below article was recently posted on the Directors & Boards website.

Any follower of President Trump’s Twitter feed knows there are a number of issues that capture his attention these days. However, even the most ardent follower may have been a bit surprised to see him recently weigh in on U.S. public company financial reporting regulations.

In a tweet on Aug. 17, President Trump ordered the Securities and Exchange Commission to examine the quarterly reporting requirements for U.S. public companies.

The President’s tweet joins a diverse number of influential voices that have recently called for changes to move the financial markets away from “short-termism,” which experts believe is hurting the economy. However, boards looking to heed these clarion calls will find practical advice that can be put to use quickly tough to find. In this shifting world the answer may lie in taking a close look at long held best practices to question how new thinking could help lead the market to a longer-term focus.

The focus on ending quarterly reporting is one example where the grand gesture hides the practical path. The fundamental utility of quarterly reporting to the investment community makes any change to minimal reporting requirements unlikely. However, addressing the “culture” of quarterly earnings is an area where Boards and management teams can make a significant impact.

The issuer to shareholder relationship has evolved significantly with the explosion of passive funds and a growing call from all types of investors for a change of thinking. BlackRock CEO and Chairman Larry Fink, summarized the issue of the short-term focus of the U.S. public market structure best: “Today’s culture of quarterly earnings hysteria is totally contrary to the long-term approach we need.”

Earnings hysteria is not solely tied to reporting.

For example, the show of earnings is a generally accepted must for public companies. Management teams dedicate considerable time and effort to the event of reporting results. While reporting results is required, much of the public effort around the reporting is not. There is merit in providing an open forum for management to clarify information with the market, but boards should ask if the current approach properly focuses on the long-term strategy of the company. Is the press release conveying the right story? Are we sending the wrong message by celebrating quarterly results internally? Should the CEO be a major presence every quarter? Should directors speak on the call once a year?

In addition to evaluating quarterly earnings practices, companies should think about how else they are meeting the demands of the modern shareholder base and demonstrating a longer-term focus; what has worked well in the past may no longer apply in today’s changed landscape.

Consider the following:

  • Invest in the proxy. Even the largest institutional investors do not have enough governance professionals to sift through every page of each proxy statement under review. However, with the rise of passive funds and the increased focus on board leadership from active funds, the proxy is now the single most important communication document produced by a public company. It is increasingly imperative for companies to engage in a thoughtful, strategic and concerted engagement effort. If the shareholder or “voter” is overwhelmed with data, the company or “candidate” must make the voting decision easier. The proxy statement must become more than a legal filing and become a strategic corporate narrative.
  • Sharpen the discussion on strategy and reinforce it annually. A well-articulated, compelling and direct strategic message is paramount to all investor relations efforts. In three sentences or less any senior leader at any organization should be able to summarize where her company is going, why it is going there and how it will get there. This message should offer credible metrics to be measured against and be updated annually or at any time it changes materially.
  • Tell the board story. Activism’s rise and the evolving modern shareholder base have put boards in the spotlight. Every company must become adept at discussing its directors’ qualifications and board refreshment strategy, as well as making the board increasingly accessible to investors.
  • Combine governance and investor relations. The corporate functions of the corporate secretary and investor relations need to become more strategically aligned. These groups have always been connected but the focus on governance at passive and now active funds means these two functions must be aligned as one strategic effort.
  • Conduct better “polling.” Companies need to take a multi-input approach to understanding shareholder dynamics. Solely relying on one set of inputs to understand shareholder sentiment leads to an incomplete view. Political campaigns smartly rely on a number of different tools to understand the electorate, and corporate leaders should think the same way.
  • Think about directors as communicators. The focus on corporate boards has added a new angle to the job description of public company directors: shareholder engagement. This is a deceptively tricky area though. Boards, alongside management, need to consider when, how and who can best represent the Board’s point of view to investors.
  • Anticipate environmental, social and governance issues. The growth of passive investing has opened the door to investors considering structural issues that contribute to long-term value. This has started with a focus on good corporate governance but is quickly moving to a discussion on topics such as gender-pay equity and environmental impact reporting. Companies should closely evaluate and monitor these topics and consider how to respond to shareholders. A poorly worded response to a shareholder proposal can shift votes quickly and cause significant reputational damage.

One size does not fit all and there are many considerations to weigh when determining how best to engage with shareholders about a company’s financial results and its progress against its stated growth strategy, but what should apply across the spectrum is that boards and investors will all benefit from refocusing on the long game.

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