When Less is More
A recent client memo by Wachtell Lipton highlights the UK government’s recent decision to stop mandating quarterly earnings reporting. We applaud this change and wish U.S. lawmakers would follow suit. The natural tendency for executives to manage what can be measured often leads to short-term thinking. Many non-U.S. companies that we follow report only on a semi-annual basis, and we are quite satisfied with the frequency of this disclosure.
Following publication of Professor John Kay’s “Review of UK Equity Markets and Long Term Decision Making,” the U.K. government concluded that “rigid quarterly reporting requirements can promote an excessively short-term focus by companies, investors and market intermediaries and impose unnecessary regulatory burdens on companies, without providing useful or meaningful information for investors,” and accordingly stopped mandating such practice, effective for 2015 and beyond. Indeed, as the Aspen Institute emphasized years ago, “the focus of some short-term investors on quarterly earnings and other short-term metrics can harm the interests of shareholders seeking long-term growth and sustainable earnings,” particularly where companies “pursue strategies simply to satisfy those short-term investors,” as doing so “may put a corporation’s future at risk.”
While U.S. companies do not, as of yet, have the option of discontinuing quarterly reporting (though they do have discretion to decline giving quarterly earnings guidance), the SEC should keep these observations in mind in pursuing disclosure reform initiatives and otherwise acting to promote, rather than undermine, the ability of companies to pursue long-term strategies.
These sentiments expressed by Legal & General — coupled with the strong views on broader topics expressed by BlackRock, Vanguard, State Street and other institutional investors targeting the U.S. market — are a welcome reminder that we may still achieve a capitalism in which long-term, responsible investors champion boards and management teams that resist pressures to maximize short-term stock prices at the expense of sustainable long-term investment and wealth creation.