Strategy & Operations » Governance » Long termism can leave companies blind to impending risks

IT IS VERY easy to jump to conclusions. We have a knee-jerk reaction that short-term behaviour does not help companies when it comes to long-term performance.

The Kay Review calls for an end to mandatory interim management statements every quarter as an obligation for all listed companies. I welcome this and it is something I have been pressing the European Commission to change for some time. Through the review of the Transparency Directive they are proposing to do just this. Good news.

Our most recent QCA/BDO Small and Mid-Cap Sentiment Index asks whether quarterly reporting leads to short-termism by investors and companies. Small and Mid-Cap companies overwhelmingly agree that quarterly reporting does lead to a short-term approach.

Companies need to take a short internal view and produce regular management accounts; however, it is not the case that external investors need to be kept update on such a frequent basis as every quarter. However, in some circumstances companies will choose, because of the nature of their business, to report on a quarterly basis; this is a discussion to be had with investors. One reporting timetable does not fit all.

In the same survey, 62% of small and mid-cap quoted companies cite “lack of liquidity” as the main reason why they believe equity markets are hindering their development. One of the key features of liquidity in a stock is a high volume of trading in the shares. This requires a varied mix of investors who take differing views and who measure performance over a variety of timescales. In this situation short-term behaviour is as good and as necessary as long-term behaviour.

A company which has an excellent investor relations programme and attracts several long-term significant shareholders will find that it also needs to attract shorter -term retail investors to create liquidity in its shares.

Professor Kay wrote in his report that “short-termism, or myopic behaviour, is the natural human tendency to make decisions in search of immediate gratification at the expense of future returns, decisions which we subsequently regret.” Sometimes we need such immediate gratification to create efficient markets.

If everyone takes the long view then no one notices the iceberg about to sink the ship.

Tim Ward is chief executive of the Quoted Companies Alliance

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