Think sustainable, end quarterly reporting | FT Alphaville

Think sustainable, end quarterly reporting

Back in February, Generation Investment Management LLP, a firm co-founded by Al Gore and David Blood in 2004, issued a report entitled “Sustainable Capitalism”. It came with various actionable suggestions for how such a form of capitalism could be achieved, inclusive of this idea (emphasis ours):

3. END THE DEFAULT PRACTICE OF ISSUING QUARTERLY EARNINGS GUIDANCE

Quarterly earnings guidance can create incentives for executives to manage for the short term and encourage some investors to overemphasise the significance of these measures at the expense of the longer-term, more meaningful measure of sustainable value creation. Ending this default practice in favour of only issuing guidance as deemed appropriate by the company (if at all) would encourage a long-term view of the business rather than the current focus on quarterly results. More thoughtful issuance of earnings guidance is compatible with enhanced standards of disclosure.

Citi’s Meg Brown, of the Climate and Sustainable Research team, noted the suggestion and asked a logical question, namely: if companies were to stop with quarterly reports, would equity analysts also feel that they could have more quality time to examine longer-term factors affecting a company’s performance, or would it make no particular difference to the way they did their work? More precisely, she asked 207 equity analysts working for Citi:

If companies were not required to issue quarterly reports it would help me consider topics that drive longer-term valuation implications for my coverage companies: Agree or Disagree?

Place your bets now on how many agreed, how many disagreed, and whether the responses varied much by region.

Bonus points for naming the region where all the analysts agreed with the above statement. Here are the regions you can choose from: Europe, CEEMEA, Japan, Australia/New Zealand, Asia, North America, Latin America.

_____________________________________

Ready?

– 118 out of 207 agreed that quarterly reports not being required would assist longer-term valuation.

Not exactly a resounding majority given the rather small dataset. However, the regional differences were interesting:

If you guessed Australia/New Zealand as the region where all analysts agreed with the statement, you’re a winner!!! As to why this might be, one of the analysts who took part in the survey provided this comment:

I agree, but I’d note that in Australia, companies are only required to disclose on a half yearly basis. That said, because that is the case, there is a lot more emphasis on earnings season so, overall, I’d agree with your statement.

More extreme:

Australia is half-year reporting and even that can be too short-term.

(Your own thoughts on what is leading to this particular result are most welcome in the comments section below.)

Also interesting was how the majorities in North America vs Europe were on opposing sides, with the old country expressing a preference to not require quarterly reports. One analyst’s comment on the transatlantic divide:

My US based clients tend to have much shorter viewpoints. EU analysts (& buyside) by nature prefer to think a bit longer term, and hence there’s more risk of being distracted by quarterly ‘noise’.

However, some analysts noted that less frequent reporting would lead to an information void in some sectors, and it’s not the frequency of the disclosure, but what companies do with it that counts (emphasis ours):

Need to make a distinction between full financial reporting and information updates. For my coverage, better disclosure of operating trends every month or quarter [would be] significantly more useful. Just reporting semi annually creates a vacuum for small and midcap stocks between announcement.

An inconvenient truth — one size does not fit all, and determining a mechanism whereby some companies fall under one regime, and others under a different one would also be inconvenient. But then again, they didn’t say it’d be easy.