Ética – Excelência – Inovação
Abolition of the obligation to draw up quarterly reports, operating costs and objectives
Valerio De Molli (Managing Partner – TEH Ambrosetti)
Marco Visani (Head of the Observatory on Corporate Governance Excellence in Italy – TEH Ambrosetti)
Quarterly reports could soon be a memory in Italy: the new European rule calls for elimination of the obligation to publish quarterly reports.
The orientation of some important countries (such as the Netherlands, Belgium and Finland) goes in this direction. In France, like in the U.K., the quarterly report is already optional. In Italy, Tod’s was one of the first companies to exploit the new possibilities granted by the Transparency Directive.
But what are the main reasons for this legislation?
First and foremost the need to decrease administrative expenses, in particular for smaller issuers, and secondly, to reduce the focus on the pursuit of short-term results which the presence of quarterly reports supposedly induces. Regarding the first point, the European Commission carried out an analysis of the costs linked to the publication of quarterly reports and consequently the potential savings deriving from the directive (Table 1).
The judgment on this regulation depends on the comparison between the “cost” of the lacking information and the benefit deriving from administrative simplification and greater “induced” attention to the long-term prospects of investments.
Moreover, the cost of the lacking information also depends a great deal on the type of sector of the issuer, on the investor’s expectations and on the practices of comparable companies. In particular, a company operating in an infrastructure business might be less interested (because its shareholders are, too) in the quarterly information, but if all the enterprises in the company’s sector continued to publish the quarterly report, forgoing it would be more complicated.
Regarding the aim of decreasing complexity and costs, especially for smaller issuers, certainly the non-obligatoriness of the quarterly report goes in the right direction, but at least two implications should be considered:
On reducing short-termism, it must be recognized that spasmodic attention to the achievement of operating goals set on a quarterly basis is a typically U.S. phenomenon: it’s enough to consider that overseas management provides specific guidance in this regard
But are quarterly reports really one of the causes of attention on the short-term? Are there alternative ways to mitigate this short-term vision?
The problem, as seen by the TEH-A’s Observatory on Corporate Governance Excellence, doesn’t lie in the frequency of the information but in the quality of its content. In general, in quarterly reports much space is given to comparison with the previous year, analytically explaining the movements of the various economic-financial magnitudes, while there is less focus on progress toward objectives of a strategic nature.
There are alternative methods that offer different perspectives: a good example is represented by the model developed in England. English companies draw up “Trading Statements”, that is, brief communiqués which certainly inform the market on the principal results achieved, but especially on updating in regard to the objectives of a strategic nature that the company has set for itself. In practice, this communication is more attentive to conveying what the company will do in the future to improve its competitive positioning than to making a detailed analysis of the past. This method, while still consenting an appropriate transparency regime, affords the market more effective monitoring with respect to the company’s broader objectives, reducing the emphasis on the short term. In addition, in this form it would also be possible to achieve the goal of reducing operating costs.
The second aspect to work on is management behavior. On compensation systems that orient management behavior, much has been done to disseminate forward-looking orientation. For example, the near-totality of the companies listed on the FTSE MIB use medium-long term incentive systems to reward top executives, and payment of a sizeable portion of the variable component of remuneration is deferred. With respect to companies’ practices a possible area of improvement in this regard is to expand the use of parameters that represent the sustainability drivers of long-term performance (and especially that lend themselves to being measured on long time horizons): for example, for companies operating in the services business, customer satisfaction should be used to a wider and more significant extent, and innovation rate could be a key performance indicator in industrial undertakings.
In conclusion, we feel that abolishing the obligation to publish quarterly reports is positive since it will give individual companies the opportunity to choose how to set up their communication as a function of their specificities: the market will self-regulate as a result, choosing the companies that have handled this gradient of freedom best.
As to discouraging short-termism, on the one hand it is possible to “reorient” the content of the quarterly report according to a more future-oriented perspective and in a more streamlined manner (on the model of the English Trading Statements) that also affords greater efficiency for smaller issuers; on the other to act on the use of indicators determining long-term performance for the purposes of management incentives.
By “educating” the market to the culture of the creation of medium-long term value, in a few years we may also no longer see the ballet of share prices corresponding to the presentation of issuers’ periodic accounts.
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