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