Ditch the quarterly financial report?

Corporate governance experts have a simple suggestion for those worried about the adverse effect of “shortterm” stock performance on long-term corporate health: Replace quarterly financial reports with a less frequent update, such as half-year results.

The idea was raised last week during the annual conference of the Institute of Corporate Directors (ICD) in Toronto.

Eileen Mercier, who is currently a director with Intact Financial Corp. and who has previously served as chair of the Ontario Teachers’ Pension Plan board, told a panel discussion that it’s time to consider whether quarterly financial reports actually mean anything.

They might give analysts and financial reporters something to write about at least four times a year, but they don’t really provide investors with help in “price discovery,” she said.

“We’re increasingly of the view that quarterly earnings are mostly noise,” she said. “I tend to think of the income statement in most industries as a work of fiction. It has become so complicated that most people can’t understand them or read them anyway.”

Advocates of the move point out that it’s not about avoiding disclosure. Companies that move to half-year results could still release interim “trading” results to update shareholders on things like revenue performance.

Critics note that quarterly reporting prompts analysts to publish three-month earnings forecasts. Chief executives know the company’s stock will get hammered if they release financial results that lag those estimates. That leads managers to cut corners on important things, such as safety, said David Beatty of the University of Toronto’s Rotman School of Management.

“I think that happens consistently, and over time, it’s hugely dangerous,” Beatty said. “Quarterly forecasts, I think, are the worst enemy in the universe.”

The theme of this year’s ICD gathering was “short-termism” — the concern that managers are forsaking the long-run prospects of a company in favour of short-term share price gains. The phenomenon has also been called “quarterly capitalism,” as some suggest the traditional threemonth financial reporting period keeps companies from making decisions that will enhance the value of the company over longer periods.

Also at the conference were Dominic Barton, global managing director of consulting firm McKinsey & Co., and Mark Wiseman, CEO of the Canada Pension Plan Investment Board. In an article presented to attendees, they report that more than 50 per cent of a typical company’s value is created by activities that will take place three or more years in the future.

“Businesses are missing out on profitable investments for fear of missing their earnings guidance,” they write. “Many institutional investors, in turn, have too narrow a focus on short-term performance, use short-term incentive strategies and are hypersensitive to the current news cycle, which leads to distorted asset prices and increased market volatility.”

In November, the U.K. government removed a rule that had required mandatory quarterly reporting for public companies based in Great Britain. Public companies may now choose to report only twice a year, according to the U.K. market regulator, the Financial Conduct Authority.

Few big U.K. companies have embraced the change. Some dual-listed companies can’t switch because their shares are listed in countries in which quarterly reports remain the norm, points out David Smith, a lawyer in the London office of Fasken Martineau DuMoulin LLP. But simpler still, he suspects British companies will keep three-month reporting because a lot of U.K. business people simply think it’s the right thing for a “grown-up” company to do.

“There are a whole lot of companies and a whole lot of shareholders who’ve gotten used to it, and who may expect it, and who may not be impressed if management removes themselves from the scrutiny of their shareholders on a quarterly basis,” Smith said in an interview.

Mercier acknowledges there likely won’t be a groundswell of support for the idea. Yet she applauds consumer products firm Unilever for washing its hands of quarterly results back in 2009. CEO Paul Polman explained at the time that publishing full quarterly financial results distracts the company from its long-term goals.