It has been labelled “useless or misleading information”, which encourages short-term decision-making.
Although part of the corporate furniture in the United States since 1970, quarterly reporting stirs up mixed emotions but it has been pulled back into the spotlight by United States President Donald Trump calling for its demise.
“Subject to SEC Approval, Companies and Corporations should no longer be forced to ‘Report’ on a quarterly basis (Quarterly Reporting!), but rather to Report on a ‘Six (6) Month Basis,” Trump wrote on his Truth Social platform in September.
“This will save money, and allow managers to focus on properly running their companies.”
Trump was highlighting an issue he first raised in 2018 when he tasked the United States Securities and Exchange Commission (SEC) with considering changing the requirement for firms to report every three months.
"In speaking with some of the world's top business leaders I asked what it is that would make business (jobs) even better in the US. 'Stop quarterly reporting & go to a six month system,' said one", he wrote in a post on Twitter.
Trump said he asked for the change to be considered by the SEC, which, in response, called in a press release for comments on the “nature, content, and timing of earnings releases and quarterly reports”.
It was heralded at the time as “possibly the most sensible tweet” of Trump’s presidency by the Financial Times (FT) newspaper, according to the International Corporate Governance Network (ICGN).
The SEC sought input on whether quarterly reporting and guidance may foster a short-term focus and how the regulator could reduce burdens on companies, while maintaining and enhancing disclosure and effectiveness and investor protections.
It is unclear what came of the public response but nothing changed in almost seven subsequent years.
Quarterly reporting as a broad concept can trace its roots to the 1929 Wall Street crash, which exposed disclosure shortcomings by public companies and led to a 1934 law giving the SEC the power to require “periodic” earnings reports, according to the FT.
Not an issue Down Under
The issue does not resonate much in Australia, where companies report every six months, except where Australian Securities Exchange (ASX) listing rules require mining, oil and gas exploration and early-stage companies not generating revenue to report quarterly.
Australian Shareholders’ Association (ASA) CEO Rachel Waterhoue said retail investors were comfortable with the Australian model, with ASX announcements and media coverage providing timely updates between formal results.
She cited ASA members who complained of having trouble keeping up with the flow of information and noted some of the biggest investment scandals were in the United States “so more frequent reporting does not guarantee greater transparency”.
“Australia’s framework strikes a balance, with comprehensive half yearly reports supplemented by ongoing market announcements,” Waterhouse told Azzet.
However, it is important for Australian investors in the United States, including superannuation funds like AMP.
Chief Economist and Head of Investment Strategy Shane Oliver said he agreed that more frequent reporting affected the focus of management, but does not think a change would make a big difference.
“There are some who prefer quarterly reporting. They like the flow of information that comes with that..,” Oliver told Azzet.
He did not believe the short-term focus had led to a diminution of innovation because U.S. companies were seen as innovative.
“But still I think the quarterly focus does drive a bit of a short-term obsession,” he said.
But AMP, which invests $133 billion for 1.3 million clients, would not change the way it invested if U.S. companies moved to quarterly reporting.
“We make do with half yearly profit reporting in Australia so I don’t think it's going to be a big issue in relation to the US,” Oliver said.
No case for change outside US
Monash Centre for Financial Studies (MCFS) Senior Research Fellow Associate Professor Nga Pham said this issue was frequently discussed at the ICGN, where she is Co-Chair of the Financial Capital Committee and a former Chair of the Disclosure and Transparency Committee.
“There was also a discussion we used to have at the ICGN about whether we should be advocating for different markets to increase the frequency of reporting, but the viewpoint seems to be, leave the markets as they are because there is no very strong concrete evidence to say that quarterly reporting is way better than semi-annual,” she said.
She said the continuous disclosure regime in Australia addressed any issues arising from less frequent reporting than in the United States.
In its Viewpoint Quarterly reporting: Too much of a good thing? published in September 2018, the ICGN said critics of quarterly reporting cited its cost, distractions on management as a compliance burden and the tendency to focus on short-term results at the expense of potentially greater sustainable value creation over time.
“These are factors that might discourage some companies from public listings or result in sub-optimal long-term decisions relating to investments, capital allocation and stakeholder relations,” it said.
Arguments for and against
The ICGN said much of the advocacy against quarterly reporting came from the United Kingdom, which stemmed partly from the Kay Review of UK Equity Markets and Long-Term Decision Making in July 2012.
According to Kay’s interim report (February 2012), a large majority of companies or investors that provided submissions considered quarterly reporting and interim management statements to be “useless or misleading information”.
“They took the view that this frequency of reporting was excessive for many businesses,” the report noted.
The Global Network of Investor Associations (GNIA), an informal information-sharing body convened by ICGN, found a range of opposing views on this issue from investor associations.
One of them was the Dutch investor association Eumedion, which agreed with BlackRock CEO Larry Fink’s view that quarterly reports provided investors with information on how companies were performing against their long-term plan.
“Strategies are carried out with investors’ capital and employees’ efforts, and in a fast-changing world, it is only natural that stakeholders expect regular updates on progress and the need for any adjustments,” Executive Director Rients Abma told Azzet.
The decision whether or not to continue publishing quarterly reports should rest with listed companies, which in Europe have sufficient incentives to periodically inform the markets about their financial and sustainable performance, he said.
ICGN was yet to issue a formal policy statement on quarterly reporting, partly because of the diverse perspectives of its members, and it was unlikely to advocate for jurisdictions to change from six-month reporting to quarterly reporting or vice versa.
Not only were arguments that quarterly reporting might encourage short-term thinking not supported by strong causal evidence, but the organisation was also aware of studies suggesting this was not the case and that relaxing reporting periods could result in a higher cost of capital as a result of greater investment uncertainty.
“We also recognise the positive discipline that reporting can bring to companies vis-à-vis their accountability to investors, both shareholders and creditors,” Eumedion said.
But quarterly guidance was a much greater concern than quarterly reporting because companies were tempted to manage short-term numbers and for investors to value companies in a similar way.
“This is probably the most sensible place to focus the overall debate, and a challenge to quarterly guidance — rather than quarterly reporting -- is likely to be an issue on which many investors will agree,” it said.
Guidance change worthwhile
American Chamber of Commerce in Australia CEO April Palmerlee said that although she understood the concern about short-term pressures, the link between quarterly reporting and short-termism was not as clear as it was sometimes made out to be.
“Transparency has real value, and regular reporting is one of the reasons global investors trust US markets. The real question is whether quarterly guidance — not reporting — pushes companies into chasing near-term targets at the expense of longer-term strategy,” Palmerlee told Azzet.
Quarterly reporting provided investors with timely information and helped the market work efficiently, but there was merit in easing the expectation for quarterly guidance.
“Guidance can be useful, but too often it can drive a 90-day focus that discourages investment in innovation, people, and infrastructure,” she said.
“Because the real problem isn’t the calendar — it’s incentives. Short-termism can come from compensation structures, investor expectations, and the news cycle as much as from reporting frequency.
“Removing guidance pressure gives companies a little more breathing room without sacrificing the transparency that markets rely on.”
Palmerlee said quarterly reporting was a cornerstone of the trust the global community had in U.S. markets.
“The balance that seems to make the most sense today is clear reporting, but with more flexibility around forward-looking guidance,” she said.
The last word on this topic comes from Democratic Senator Elizabeth Warren, who was in no doubt about why Trump was opposed to quarterly reporting.
“It undermines transparency. That is the whole point here," she was quoted as saying in a Yahoo Finance story.
