Trump is right: corporations should stop reporting quarterly

There is growing support for long-term capitalism, which considers its role in society

As the Royal Bank of Canada reported quarterly earnings this week of $3.1 billion, one just might be enticed to fall in line with U.S. President Donald Trump who pondered, in his spare time, whether the moment to bid farewell to quarterly reporting is now.

I mean, wouldn’t we all manage a little better, emotionally, if we were to gaze upon bank earnings only half as frequently, that is to say biannually, instead of seasonally, as current regulations have it?

Could that make business, as Trump suggests, “even better”?

The president tweeted that he has asked the U.S. Securities and Exchange Commission to study the issue, and then attended to more pressing matters related to crystal balling a stock market crash should he face impeachment.

But let’s hold the first thought. In the wake of the 2008 financial crisis, the urgency to “fix” capitalism focused first on the regulatory reform needed to realign a gamed system. The public trust was shot and remains badly frayed. Bail-outs were for the rich. The winner-take-all ethos had affirmed the financial primacy of the thinnest layer of society, and the gap between the super-wealthy and everyone else was ever widening.

But the need for fundamental reform demanded more than regulatory fixes. Bank of England Governor Mark Carney was one of the vocal advocates for an inclusive capitalism, recognizing that finance, as he put it, had become detached from the real economy.

“It’s necessary to rebuild social capital in order to make markets work,” he said in a speech four years ago. “Business ultimately needs to be seen as a vocation, an activity with high ethical standards which in turn conveys certain responsibilities.”

There was a lot of talk, then, about the need to look to long-term value creation for all.

Focusing Capital on the Long-Term, founded by a group that includes McKinsey & Co., the CPP Investment Board and New York money manager BlackRock, gained a high profile for its advocacy of setting long-term corporate goals (sounds obvious) and eschewing short-term strategies aimed at short-term results.

The Coalition for Inclusive Capitalism, founded in 2014, brings together corporations (DuPont, PepsiCo, Nestle, to name a few) and asset managers (JPMorgan Chase, Fidelity Investments and others) with the lofty goal of creating a new model, or framework, for how companies can measure and report on long-term value creation.

What might those metrics be? We don’t yet know.

Both organizations decry the shorttermism that colonized executive thinking, a short-termism reinforced by short-sighted compensation models, an expectant shareholder community and in some instances a codependency fed by agitated activist investors.

It was McKinsey’s Dominic Barton, in a piece published in the Harvard Business Review, who coined the phrase “quarterly capitalism” in the spring of 2011. Deep reform can’t be accomplished, he wrote, unless business guides a shift from this quarterly capitalism to long-term capitalism. “It’s about rewiring the fundamental ways we govern, manage, and lead corporations,” he wrote. “It’s also about changing how we view business’s value and its role in society.”

I’ve written before about the players leading the movement, including Unilever CEO Paul Polman, whose push on the sustainability front has been as pronounced as his fixation on taking the long view. “Business needs to be an active contributor to finding the solutions that have an impact on society,” he said at an investor forum last winter. “After all, if business cannot show what positive impact it has, why should the citizens let this business be around?”

It’s unlikely that rebuilding social capital was what Trump was aiming for with his “stop quarterly reporting” tweet. Going to a six-month model “would allow greater flexibility & save money,” he wrote.

That, of course, is beside the point. It’s less the regulatory requirement for quarterly financial disclosure that distorts corporate behaviour, and more the expectations created when companies provide quarterly earnings guidance. The pressure to “make the guidance” sets in train a model of market expectations that at least some research has found leads companies to prioritize decisions that will produce the most impressive quarterly financial results at the expense of long-term performance.

Polman was one of the first, by the way, to jettison the practise of providing quarterly guidance when he took the reins at Unilever a near decade ago. What we have witnessed since is a slow move by corporations to provide what the Focusing Capital on the Long Term folks call a long-term “roadmap,” communicating their long-term strategies as part of their investor communications.

In June, the U.S. National Investor Relations Institute updated its policy statement on the matter, recommending that companies “provide longterm guidance (i.e., one year or longer) on a consistent set of financial and non-financial metrics (italics mine) that, together, constitute the key long-term value drivers of its business.” The key there is “consistent.” A company can’t just jettison an unmet metric, or at least not without an explanation.

What this all leads to is a more complex, holistic and sophisticated assessment of corporate performance, which isn’t at all what the president had in mind.