LEGAL & GENERAL’S CEO Nigel Wilson isn’t a man to mince his words. The former FD (and Harvard Business School graduate) has been pretty vocal on a range of issues, not least the benefits of a Brexit.
So it was fitting that the straight talking CEO should come out as one of the strongest advocates of ending quarterly reporting. The message was clear: “Our business cycle is long-term, with many of our investment and business decisions playing out over years and sometimes decades, rather than quarters,” Wilson said.
“As such, ending quarterly reporting will allow us to focus on communicating what is relevant to the value creation in Legal & General’s businesses.”
That was December 2015, a little over a year after then business secretary Vince Cable, had, via the FRC, delivered on the recommendations made by John Kay in his report into the state of the equity markets in 2012, and in so doing ended the requirement for listed companies to report to the markets on a quarterly basis.
The Kay report was clear, saying, “The meaningful measurement of annual profit requires fine and subjective judgment, and quarterly earnings will be dominated by random fluctuations – or worse, will be managed to avoid them.”
At the time, there was widespread support for the move, with most FDs and CEOs broadly in support. Schroders announced it would prefer the FTSE 350 not report quarterly. Meanwhile Unilever, whose chief executive Paul Polman lamented that, “A lot of companies are driven by the short-termism of the markets,” did away with their quarterly reports entirely.
“Those companies make short-term decisions that often go against the long-term viability of the company,” Polman explained in an announcement. “Before I came, we were making a lot of short-term decisions to make the quarterly numbers, [and these decisions were] actually driving the company, over time, downwards.”
Unilever has for the past decade blazed a trail in corporate reporting, eschewing short term forecasts and reports in favour of an integrated reporting approach focusing on long term strategy and in particular sustainability.
However, so far very few, if any, FTSE 350 companies have followed suit. Alex Tamlyn is partner and head of capital markets EMEA at corporate law firm DLA Piper. He believes that for too long, corporates have made the mistake of thinking that the volume of disclosure is really what the market needs rather than the quality of the disclosure. And while he welcomes the removal of mandatory quarterly reporting, problems remain.
“The trouble is although we’ve taken away mandatory quarterly reporting, we look at what the FTSE 250 and FTSE 100 are doing and we find that a lot of companies are still quarterly reporting even though they don’t have to.”
So why is this? “Well, it indicates to me not that companies of that size are all fearful of litigation but they are responding to what they perceive to be a demand from the market for these reports.”
The perception that it is investors who demand quarterly updates is widespread. However, March 2016 saw another important development, when the Investment Association, whose members manage more than £5.5trn for clients around the world, came out with its Productivity Action Plan, a wide ranging document aimed at boosting the UK economy through long-term investment, helping to reverse the UK’s Productivity problem. Top of its list of reforms was the call for companies to exercise their freedom and drop QR.
“We think that if you change the dialogue between companies and investors, and move away from quarterly reports it does two things: it helps management think about the long term strategy of the business (and frees up a lot of time because they’re not having to produce those reports); but it also changes the tone to a longer term basis: what’s the strategy, how are we delivering on it, what are the drivers behind it and what needs to change.”
That’s the view of Andrew Ninian, director of corporate governance and engagement at the IA. He has the job of persuading the UK’s corporates that quarterly reporting has had its day.
“The key thing is that the Product Action Plan was developed by a group of 15 of our senior members – many of whom came into that discussion and said, ‘we don’t need quarterly reports; we don’t look at them’. Already Schroders and L&G have said that.”
However, Ninian admits that while the demand from the buyside is for QR to be removed, “The issue of course is that sell side analysts like it – it gives them the numbers to plug into their analytical models.”
That view is shared – to some extent – by David Forth, currently FD of AirWear, the makers of Dr Martens shoes. His background is largely retail and FMCG-focused, and has included roles as FD at Costa Coffee for Whitbread, Mothercare and Borders, among others. For him, while QR has its flaws, the alternatives may be worse.
“The problem is that the analysts expect to receive a constantly improving business, and real businesses don’t constantly improve,” Forth admits. “But in pushing back against quarterly reports, people ignore the reality: investors want to know how the thing is going, and if they don’t see it quarterly, when do they see it?
“If it’s only annually, that means it’s reporting on past conditions,” he says. “Look at retail: a lot of retailers with a March year end don’t make any money in the first two quarters, and only do well in other parts of the year: retail is a seasonal business and all of these things are material.”
Forth says that while there is much to admire in the Unilever and L&G approach, but those businesses are different in that they lay bets on large capex projects that can be measured in decades. “Even a mid market retailer will typically get daily sales figures, and analysts – and by extension investors – will want to know if this season’s range has sold well.” Forth says it is important that quarterly reports allow for this information to be shared in a coherent and fair way.
“The good thing about quarterly reports, even though they can be a pain a lot of the time and requires work and planning, at least it’s a controlled environment: you sit down and the CEO reads from a script into a webcast. The questions are predictable and you can practice your answers. In some ways it’s like a set piece in rugby: you all hunker down and engage.
“While it sounds a bit anodyne, what it means is that the business, which isn’t entirely and exclusively run for the shareholders, but also for those working in it and the customers and so on – you can control the information that’s given to the outside world in a controlled way. You need to have control over the disclosure of valuable information.
Tamlyn agrees it that there has to be a clear and coherent disclosure framework – “I describe that to my colleagues and clients as the oxygen that makes the markets function, and the system begins to stagnate and it’s as unattractive as a pond which doesn’t get oxygenated; it stinks and it doesn’t sustain an ecosystem” – however he believes the volume of quarterly reports adds little to the general understanding of company performance and shouldn’t be seen as a substitute for clear and useful reporting.
So what next? For its part, the IA is continuing to build on the work started by the Productivity Action Plan. Ninian says the next twelve months will see the focus switch to addressing the varied needs of different sectors, many of which are still firmly wedded to a quarterly cycle of reporting.
“We recognised for some sectors that’s difficult. So we’ve committed to have some round table to understand individual company or sectoral concerns to see how we can develop transition away from QR to a longer term approach,” he explains, adding the effort is important because of the global nature of most FTSE 100 companies.
“And we’ve already heard some concerns that those with a US listing for instance that they’re required to do it, or their global peers will continue to report in that way, and so we’re trying to work those issues with them and understand their concerns and how we can make progress.”
For Tamlyn, there is a way around the seemingly intractable tension between timely short term disclosure and long term strategic reporting. “I also feel that businesses which invest significantly in developing an organic relationship with their core investors, with their top 6, or top 10 institutions, that’s the way that businesses develop mutual trust with the investing community; and believe it or not, hard bitten asset managers at major investors do have a heart. They do have a conscience and they do have the ability to trust, and if businesses invest enough time in achieving that trust and nurturing it, the trust becomes reputation, the reputation becomes brand, and so the virtuous circle turns.”