Every now and then a remarkably bad idea springs to life. It gets debated, ridiculed and eventually discarded. In the marketplace of ideas, free and open debate help to determine which ideas are useful and which wind up in the rubbish heap. (John Stuart Mill was onto something). We tolerate reprehensible ideas because, ultimately, free speech leads society toward a greater truth.
Today’s column is about a concept so misguided and ill-conceived that it cries out for a debunking.
The idea is that publicly traded corporations should stop reporting their quarterly financial results. Moneybeat reported that the idea originated in the U.K., with Legal & General Investment Management, which manages $1.1 trillion in assets. Legal & General, according to the report, “contacted the boards of the largest 350 companies on the London Stock Exchange supporting a move away from quarterly reports.” That idea is now being championed in the U.S. by Martin Lipton and Sebastian Niles, both of the law firm Wachtell Lipton.
Before we dissect the problems with this proposal, let’s acknowledge upfront that there are many legitimate problems related to the quarterly earnings dance. It gives some companies an excessive incentive to disproportionately focus on short-term results. The pressure to game accounting can be overwhelming, and the way many companies use and abuse financial reporting is laughable. Longer-term capital expenditures, research and development, and investing can get neglected for fear it might hurt the quarterly numbers. Ignoring the long term leads to ill-advised acquisitions, needless firings and relentless obsession with cost cutting. Short termism certainly underlies the current practice of borrowing money to buy back shares.
Continues at: Wrong Fix for Short-Term Corporate Thinking
Monthly reporting of numbers would be better. The relatively random nature of month to month revenue and costs would drive home the concept that companies and markets are not programmable on cruise control. it would force the conference calls to focus on substance instead of the random variation of inputs.
Vesting stock options at a price based on three-year rolling average stock price (similar to how many pensions are calculated based on averages of several years of salary) would then help influence managers to smooth out corporate financial performance with an eye to future growth. Timing an earnings pop to management’s options vesting would no longer make much sense.
Marty Lipton is in the business of selling legal services to corporations. One of his major marketing ideas is to make CEOs happy by freeing them from the tyranny of shareholders and regulators that want to interfere with their ability to be paid enormous amounts without accountability. For example, he has numerous screeds against “activist shareholders”, i.e., those who own the company and don’t want the CEO to run rampant. This suggestion is yet another example.
Look at Amazon or many other tech companies that invest for the future. How does this square with short-termism?
Your answer is the best – better align CEO pay with long-term shareholder interests.
They lowered CEO pay in Seattle! Look what happened! Absolute Destruction!
https://www.aei.org/publication/seattles-70000-man-and-local-politicians-get-an-economic-lesson-in-the-law-of-unintended-consequences/
Well, OK the American Enterprise Institute doesn’t’ exactly support my argument. But why should that stop me?!
Hey Koch? Where’s my check for planting this comment?
Too much cost! Too much regulation! Freedom from the liberal accounting firms! Stop impeding on the men who are Ayn-Randingly superior to you!
Besides, Adam Smith’s “invisible hand” works best in the absence of good information with reliance on gossip and back-room dealing.
My guess is that Steve Cohen etc. would love to have quarterly reporting going away so that insider information would become MUCH more valuable.
It’s simply a corollary of the Efficient Market Theory, wherein markets always do what they ought to, self-regulating as needed.
TSMC publicly reports its revenues monthly, providing a pretty good general picture of how they are doing.
http://www.tsmc.com/tsmcdotcom/PRListingNewsArchivesAction.do?language=E
I see no reason why every business cannot do the same.
If a company’s business model is so complex as to make it infeasible to do this, they should not be allowed to sell stock to the public.
http://www.gocomics.com/nonsequitur/2015/08/19
FWIW as I recall in the early 1990’s Australian companies were perpetually behind in reporting – this made corporate acquisitions a bit chancy and involved significant sums being held in escrow. Can any BP reader confirm this?
“corporate management is paid for how well the stock market is doing, as opposed to how well their company does.”
If management is to be compensated according to performance, then presumably that should also include failure. CEOs who know they’re going to walk away from the crashed wreckage of their companies with millions aren’t exactly getting the right incentive.
and using ‘stock’ price to judge corporate ‘performance’ was just what executives wanted since it was pretty easy to ‘rig’ it using fairly easy things to do like stock buy backs and dividends. since both of those can be used to bribe stock holders into buying more stock leading to even higher stock prices, which of course increases executive pay. and considering how much of the stock market is driven by retirement funds, and others like them, that dont hold any particular stock for long. and the funds have no incentive to ensure the company is runs well or even survives (they are using other people’s money to buy the stocks after all) there is little incentive for long term investment by US business. and since no one really punishes bad corporate performance, or malfeasance, the game goes on. till it stops. but that only will impact the last CEO and employees, and customers. and stock holders, which of course maybe decades later.
Consider Poloroid and Kodak. both of them did little to keep their companies going long term. and it took decades before the final collapse happened.