Reporting Profits Daily Would End Corporate Short-Termism
Think there’s too much hoopla about quarterly earnings? Imagine if the circus moved to twice a year
Bloomberg, August 20, 2018
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. Chief Executive Officer Jamie Dimon and Berkshire Hathaway Inc. 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.” Trump directed the Securities and Exchange Commission to study the idea of moving reporting requirements from quarterly to twice a year.1
This is exactly backward: more frequent reporting makes the data less significant. In the real world, human behavior emphasizes what occurs less often — meaning doing something less frequently gives it an even greater significance than something that becomes routine or common.
That is the difference between a New Year’s Eve celebration and a married couple’s weekly date night.
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.
This is counterproductive.
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.
Consider Amazon: it has continuously invested in expanding into new markets and new technology with little regard for quarterly profits; indeed, CEO Jeff Bezos outlined this long-term focus 20 years ago in his first letter to his shareholders. Compare this to General Electric Co., whose unhealthy obsession with beating expectations by a penny 2 a share during the 1990s made the company look far better than it really was. Since that time, accounting fraud, executive turmoil and subpar performance have led the company to shed almost businesses amounting to two-thirds of its market value.
I’ve also 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 “dead tree, snail mail” update: multiple accounts, benchmarks, capital additions or withdrawals all had to be accounted for. Sometimes the portfolio beat the market, often it did not. 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. Maybe one day it will be in real time.
Once daily access to performance data became available, people stopped caring about quarterly numbers. The unhealthy short-term obsession simply disappeared, replaced with a simpler but 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. Maybe a transition period would be needed, with monthly reporting. The frequency would reduce the chance for big surprises and disappointments. As technology and reporting systems improve, the numbers could be reported daily.
The bottom line is so obvious: To make quarterly earnings less important, we should be exploring ways to report results more often, not less.
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1. For those who wish to remain free of the tyranny of quarterly reporting, there is ample venture-capital funding available.
2. The accounting malfeasance was enabled by GE Capital — the company’s ability to magically always find a few more dollars eventually led to an SEC investigation, and fines for false accounting.
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I originally published this at Bloomberg on August 20 ,2018. All of my Bloomberg columns can be found here and here.
