Ending quarterly reporting not effective in battling short-termism in UK: CFA study

Singapore

THERE was little difference in the levels of corporate investment by UK companies between those that stopped quarterly reporting (QR) and the firms that continued, according to a 2017 study.

To cut compliance cost for issuers and encourage long-term investment, the European Union's Transparency Directive was amended in 2013 to remove QR and was subsequently implemented by the UK in 2014.

However, the 2017 CFA Institute Research Foundation study on the impact of reporting frequency on UK public companies found that companies who did away with QR saw a steeper decline in analyst coverage.

The report suggested that this may be due to the fact that firms that stopped QR are generally smaller and did not provide managerial guidance when they were issuing QR.

While the report found that over 90 per cent of UK companies still put out quarterly reports a year after the requirement was abolished, the number has since fallen.

The Financial Times reported in July 2018 that between October 2016 and August 2017, the number of FTSE 100 companies issuing reports fell by 18 per cent, from 70 to 57. Among the FTSE 250, it fell by 25 per cent, from 111 to 83.

The UK's move to remove QR came after years of opposition from those who believed that it places too much emphasis on short-term benefits, or short-termism. But the CFA report said: "Contrary to the rationale behind the 2013 amendments to the EU Transparency Directive, moving from quarterly to semiannual reporting is not an effective remedy for undue corporate emphasis on short-termism."

Instead, it proposed broader reforms such as lengthening the duration of executive pay for companies to take on a longer-term approach towards investments.

This reinforced the earlier opinion of UK economist John Kay who wrote an extensive review in 2012, calling for a shift away from short-termism.

In his report, he concluded "that short-termism is a problem in UK equity markets, and that the principal causes are the decline of trust and misalignment of incentives throughout the investment chain". The report then recommended the removal of quarterly reporting among other broader recommendations.

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