On May 30 this year, the European Parliament announced that it reached an agreement under which listed companies, including small and medium-sized issuers, will no longer be obliged to publish quarterly financial information. This, they expect, ?will contribute to less administrative burden and should help to discourage short-termism on financial markets.? The new rules come into effect from 2015, and though a mere formality, still need to be voted upon by member countries. Companies will then report half yearly.
The Kay review in the UK too reached a similar conclusion. Set up to look at the UK equity markets and long-term decision making, it concluded that short-termism is a problem in UK equity markets, due to ?the decline of trust and the misalignment of incentives throughout the equity investment chain.? Responding to the ?call for evidence,? the CBI, the National Association of Pension Funds and the Investment Management Association, all argued for removing quarterly reporting obligations and encouraging high quality narrative reporting.
In India, companies need to report earnings on a quarterly basis too, so it is surprising that after the European Parliament?s announcement, Indian corporates have not yet begun to murmur that they too would like to move in this direction. In fact, this topic has not excited much public debate here in India. After all, it is equally burdensome for Indian companies to report on a quarterly basis, to say nothing of additional resources and cost associated with this exercise. There are some more arguments weighing in on reporting less frequently.
Businesses are seasonal in nature so it makes little sense for a sugar manufacturer to report what it did during an Indian summer. If at all this will be at variance from the final year-end data and needlessly distort the reporting. Seasoned market players have their own take. They argue that this increases interest from speculators and day-traders who are looking to exploit market volatility. The gyrations in the Infosys stock on the day it reports its quarterly numbers, cannot do the faint-hearted any good. Not just do quarterly result announcements encourage day-traders, they argue, but that for long-term investors this is just ?noise?, and irrelevant to the decision-making process. So the question then is for whom does the bell actually toll? And finally, managements on the quarterly results treadmill often sacrifice long-term objectives to meet, if not beat, the analysts quarterly forecasts. This was borne out by John Graham et al when in a survey of 400-plus executives, they found that a surprising 78% admitted to sacrificing long-term value to smooth earnings.
In India, as in the US, regulators prefer more regular reporting to less. And at least for now, they seem clear on why. One, it negates any edge that the management and other insiders might have?of course, this presupposes they trade on inside information. A higher frequency of financial disclosures implies that price sensitive information is now available to a wider audience on a more regular basis. Two, this shorter gap makes window dressing a bit more difficult. Three, regular disclosures also implies greater scrutiny. Add to this that companies are reporting production data to industry associations on a monthly basis, so why not to their shareholders each quarter? And as the equity markets get more institutionalised, their ability to digest data, draw trends and patterns goes up. Four, recurrent disclosures mean investors have an opportunity to engage with company managements asking for a fix, before things deteriorate completely. Finally, Indian corporates have grown at break-neck speed these past few years, many growing at 20%-plus each year?a far cry from the ?Hindu rate? that companies in more mature markets have experienced. What this means is that every few years you are looking at a very different creature and more periodic financial disclosures are needed.
What of companies? In Europe, the expectation is that while companies will no longer be obliged to disclose quarterly financial information, companies, particularly the larger ones, will continue to do so to meet investor expectations. The Graham survey cited above gives the answer. It finds that for company executives ?the two most important earnings benchmarks are quarterly earnings for the same quarter last year and the analyst consensus estimate.? This survey also finds that ?managers make voluntary disclosures to reduce information risk and boost stock price but at the same time, try to avoid setting disclosure precedents that will be difficult to maintain.? This highlights a very important aspect of disclosures. Once markets get used to a particular level of disclosure?be it the periodicity or the nature?it is very difficult to wean it from these. Changing the standards is then seen as being less than fully open.
This may explain why Indian corporates have not been too vocal about change, preferring to live with the flow from one quarter to the next, or quarter se quarter tak (QSQT), as overburdened CEOs fretfully describe it.
The author is managing director, Institutional Investor Advisory Services India Ltd, an advisory firm dedicated to providing participants in the Indian financial markets with voting recommendations on shareholder resolutions, independent opinions, research and data on corporate governance issues