To end short-termism, report on profits daily
Barry Ritholtz
Want to end corporate short-termism and all the heavy breathing that comes with quarterly earnings reporting? Then report results daily.
The excessive focus on stock price — and stock-option bonuses and compensation in the executive suite — is thought of as a driver of share buybacks and decreased capital spending, especially in research and development.
Recently, JPMorgan Chase & Co. CEO Jamie Dimon and Berkshire Hathaway CEO Warren Buffett called on companies to move away from “providing quarterly earnings-per-share guidance. In our experience, quarterly earnings guidance often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability.”
President Donald Trump went even further: he asked financial regulators to “consider allowing public companies to share information with investors less often.”
This is exactly backward. More frequent reporting makes the data less significant. In the real world, doing something less frequently gives it a greater significance than something that becomes routine or common.
Twice a year earnings reporting will make the event so momentous, with such focus on it that any company that misses analysts’ forecast will find their stock price shellacked. The twice-yearly focus on making the per-share number will become overwhelmingly intense.
My proposal: Report earnings monthly, with the goal of eventually moving to a near real-time, daily, fundamental update. Technology is improving to the point where business intelligence software and big data analyses will make this automated. Indeed, some companies already do much of this internally.
Once financial reporting becomes daily, the short-term earnings obsession will all but disappear. In its place will be a focus on broader profit trends and deeper analytics.
Plenty of people who have studied the issue of quarterly reporting find that it places an unhealthy emphasis on meeting or exceeding forecasts. The entire history of guidance and so-called whisper numbers reflects this short-term emphasis, as opposed to managing a company to thrive over the long-term.
I’ve seen first-hand what the pressure of quarterly reporting does to a company. Some years ago, I worked at a firm that reported on its investment performance each quarter. Preparing the documents for all of the numbers was a huge deal. Each client household would receive a full update. After the personalized report would go out, the phones and email would light up with questions.
The focus on those numbers every three months was an unhealthy obsession among clientele and staff alike. I wanted to avoid that issue when we launched our firm. Working with a software vendor, we give every client an application that allows them to see exactly how well they have done on a daily, weekly, monthly, quarterly and annual basis. It’s updated daily.
Once daily access to performance data became available, people stopped caring about quarterly numbers. The shortterm obsession disappeared, replaced with a more important question: “Am I on track to meet my longer-term goals?”
Changing the reporting conventions of U.S. corporations would do the same thing.