Businesses have not been required to publish interim management statements since 2014. Few have chosen to take advantage. DLA Piper’s Alex Tamlyn looks at why
ONE of the greatest challenges in today’s boardroom is the persistent demand for transparency and accountability. The ‘shareholder spring’ of 2012 kick-started a wave of votes against remuneration packages. Shareholders require better information about company activity, alignment and performance via a matrix of disclosures including financial progress, planned investments, and corporate attitude to risk.
Mandatory quarterly reporting, first introduced in the UK in 2005 for financial periods beginning in January 2007, has been an important element of these disclosures. Its principle objectives were to guard against corporate failure, improve transparency and prevent instability. The theory was that if investors were regularly informed about company activity, the risk of failure, or at least the risk of inadvertence, would be greatly reduced.
Since the financial crisis of 2008-09, it has not been popular to suggest that companies should disclose less. But the frequency and length of disclosures do not necessarily provide the real transparency and quality of information which shareholders value and expect from businesses and their boards. Clockwork announcements do not foster an overarching culture of long-termism and value creation.
Disclosure does not eliminate danger
In November 2014, the Financial Conduct Authority (FCA) removed the rule requiring publicly listed companies to release interim management statements. Interestingly, many companies chose not to take advantage of the deregulation and so in March 2016 the Investment Association (IA) called on companies to stop quarterly reporting altogether, urging a refocus of their reporting efforts on longer term issues.
Although quarterly reporting has successfully increased the volume of information shared, the quality and usefulness of this information is what is now being questioned. It is a fact of life that businesses must demonstrate earnings growth and dividend yield, but when that aspect becomes all-consuming and is pursued at the expense of long-term viability, it is often deeply unhealthy.
The IA also published a checklist which directly acknowledged that the priority should be on long-term investment and value creation at the company, not short-term reporting with an emphasis on quick gains.
Companies such as Legal & General, Unilever and G4S saw the merit of this early on, scrapping quarterly reporting as soon as it ceased to be mandatory. They recognised that while short-term investors may perceive a benefit from production-line data feeds, this approach was detrimental to stakeholders with longer-term goals.
Quarterly reporting does impose disclosure discipline upon reticent companies, but also drives behaviour which focuses on arbitrary deadlines and not on providing real insight into the company’s performance. It provides grist to the mill of commoditised compliance and encourages a pernicious “jam today” culture within the boardroom.
Evidently many FTSE 100 companies still report on a quarterly basis. Perhaps it has become a part of corporate culture and therefore a difficult habit to break. Or maybe there is an element of herd mentality at play, with companies reluctant to break cover from the safe conformity of their peer group.
No doubt a further reason for keeping the quarterly reports schedule is the perceived significance and influence of the audiences at which the disclosures are directed. Put shortly: faced with the intense heat of investor expectation, companies are unlikely to rock the boat.
Changing their ways
Reporting every quarter is not the only way to increase corporate accountability and transparency. Instead of seasonal announcements, an increasing focus has been on the quality and integration of reporting e.g. thoughtful combination of financial and non-financial data. It is far from easy to do this well, but at its best it offers stakeholders a three dimensional view of businesses together with a much better sense of their performance against short, medium and long-term objectives.
In principle, integrated reporting enables stakeholders to make better informed assessments of companies and their long-term prospects. The practical outcomes will take time to develop but signs from early adopters are very encouraging.
Play the long-game
Short-termism is not an inevitable by-product of quarterly reporting. Nor is it certain that reporting just twice a year will mean that companies operate more strategically. What is clear, however, is that mandatory quarterly reporting does distract companies from designing for the future and from developing a strategy for long-term value creation.
The seductive and dangerous voice of the “now” culture is well understood by professor George Serafeim from Harvard Business School, who recently described the imperative of a role within the boardroom for an individual responsible for “integrating sustainability into the core of business”: in essence, a chief future officer. What has become clear is that the remit of regular communications must now encompass not just the facts and figures of today, but also the thought processes which will keep the business relevant for tomorrow.
Businesses need to be forward-thinking, assessing performance on the sustainability of their business model and their fitness for the future. Shareholders are increasingly becoming a part of this process and therefore boards must carefully articulate the values for which their companies stand. This statement of values will be the first reference point in assessing how the behaviour of the business aligns with its long-term performance.
Alex Tamlyn is a Partner at DLA Piper and leads the DLA Piper’s EMEA Capital Markets Group