Companies need to turn down the reporting noise for investors
Corporate transparency has become a global trend, but some argue it has been taken too far
In 1903, US Steel released the country s first annual report, a slim and delightfully direct volume where the only padding was 21 pages of photos of smoky factories and sturdy railway cars owned by the corporate giant which went on to become the first $1bn company in history.
Such reports were entirely voluntary, but the wreckage of the 1929 stock market crash and the Great Depression triggered a revolution in corporate disclosure. The Securities Exchange Act of 1934 required all US public companies to publish standardised periodic financial information to help investors assess their prospects.
Since then, there has been a one-way movement towards greater corporate transparency, as further regulations and investor demands have pushed companies into sharing like social media-obsessed teenagers. But there is now growing talk that the trend towards more frequent and detailed corporate reporting may have gone too far because it feeds short-term thinking among company executives and their investors.
US President Donald Trump fanned the debate earlier this year when he tweeted that “top business leaders” wanted to scrap quarterly reporting, and said he had asked the US Securities and Exchange Commission to investigate a semi-annual reporting system. More recently, Apple caused a stir when it said it would no longer report unit sales on its biggest products, such as the iPhone, iPad and Mac computers.
The abrupt move unnerved investors and contributed to Apple’s stock suffering its biggest one-day slide in four and a half years, but the firm insisted these metrics were a poor measure of how it was doing.
“As demonstrated by our financial performance in recent years, the number of units sold in any 90-day period is not necessarily representative of the underlying strength of our business,” said CFO Luca Maestri.
Investors might have been displeased by the move, but it seems clear that the greater transparency of US firms is not necessarily making them easier to analyse. It might, in fact, just be adding noise to the investment process and makes being a public company overly arduous.
There are almost 15,000 analysts in the US investment industry, according to eVestment, and thousands more on the investment banking “sellside”, despite the number of US public companies halving in number over the past decade to about 3,600.
And the evidence that this has led to superior research or investment outcomes is pretty unfavourable. Only about 14% of US equity funds have managed to beat the stock market over the past decade, despite increasing corporate transparency.
The accompanying earnings call is a good example of just how pointless all this extraneous information is.
Analysts often ask laughably obtuse questions, not to glean valuable information that is somehow not contained in the voluminous results but to show how well they know the company and ensure continued access to its executives.
They can then parlay this into chaperoned visits at corporate HQ for investor clients that in practice pay their salary.
The question is what, if anything, can be done. The biggest bugbear of corporate executives is the guidance that investors and analysts now take as a given. They argue that these theoretically voluntary but pretty much required guesses on the immediate business outlook binds their hands and feeds short-term thinking.
But companies that have tried to tiptoe away from guidance, as Apple did, have been punished by the market.
Scrapping quarterly reporting requirements sounds tempting, but might not change much. The UK stopped mandating quarterly reports in 2014 in an attempt to encourage longerterm planning by companies.
However, the vast majority have continued to follow the globally entrenched practice of releasing detailed results every three months.
New thinking is needed. In an era where investors will be able to find out more and more realtime corporate and economic information from third-party “alternative data” providers anyway, the best solution might be for companies to give out less detailed information — but to do so more frequently.
In other words, a sparse, oldschool rundown of the main financial metrics once a month, and more detailed, glossy presentations once or twice a year. That could strike a balance between ensuring investors still have timely (and less noisy) information and giving executives more space to think more beyond the coming quarter.
In reality, moving to such a system will be impossible unless there is legislative enforcement, with markets likely to punish any company that eschews current orthodoxy.
However, with several innovative technology companies likely to list in 2019, perhaps one of them fancies taking advantage of the flexibility contained even in the current system to attempt to disrupt corporate disclosure as well?/
FURTHER REGULATIONS AND INVESTOR DEMANDS HAVE PUSHED COMPANIES INTO SHARING LIKE SOCIAL MEDIA-OBSESSED TEENAGERS