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The long and the short-term of it

Forcing companies to issue quarterly reports will invariably lead to short-termism, despite the EC's claims to the contrary.

Fashion makes fools of us all, ultimately. It is quite amazing how, just when one person thinks something has becoming terribly passe, lo and behold, someone else will think it is the bee’s knees. And so it is with the issue of quarterly reporting.

In the US, companies have had to report corporate figures on a quarterly basis since 1946. But post-Enron and other disasters, the issue of short-termism has increasingly brought them to the understanding that the only thing quarterly reporting succeeds in doing is put everyone under pressure to produce figures which are, to put it mildly, pushing reality to the limits.

But Europe takes a different view. Just as the US is coming to its senses, the planners at the European Commission are losing theirs. A few weeks ago, the EC issued a document on how to bring about transparency in corporate reporting across Europe. And part of the answer, it transpired, is that we should all move to quarterly reporting. This, in light of the way thinking is moving in the US, is both sublime and daft. “The EC is purely following the US. It is ‘me-too-ism’ and it’s a great pity,” says one senior European regulator.

But surely the EC wouldn’t make such a stupid mistake. Well, it just might. And if you read the proposals, you can see why. The EC lives in an unworldly ivory tower all its own, where the view is that business proceeds on the basis of an icy logic and never suffers from all the messy confusion that stems from human nature. The EC transparency requirements take note that people say that quarterly reporting leads to short-termism.

But it has the answer to that. They simply state that their proposals “will not give rise to short-termism”. They talk a bit about the pressures of analysts, ever-increasing expectations, and all the other issues that result from quarterly reporting. But then they simply say that sensible companies will have no truck with such things. Stroll on.

In the US, the tide is turning. Take the Zions Bank, a $25bn institution based in the clear-thinking world of Salt Lake City, Utah. It cannot ignore the rule to report quarterly, but it can try to defuse the situation. It has just announced that it will no longer offer what is known as earnings guidance. In other words, it will no longer play the game with analysts of talking up expectations.

The then CEO of Zions Bank, Harris Simmons, summed up the issue of quarterly reporting succinctly. “You do the wrong things for the wrong reasons to achieve a short-term outcome,” he said. Precisely.

The EC wants companies to report net turnover and profit or loss before or after deduction of tax. Even here the rules are not much use, according to Robert Bittlestone of Metapraxis, who argues that unless you also include a cash-flow statement, all the lessons of how to spot an Enron will have been forgotten. The EC figures would also be unaudited.

But the key to the EC requirements is that they would allow an earnings-per-share figure to be calculated. And that, says Roger Davis of PricewaterhouseCoopers, one of the great veteran gurus in his field, “simply increases the focus on short-term EPS”. For Davis, the proposal “goes against the grain of corporate reporting, which is the measure of long-term value”. This is the heart of the argument. Everyone knows that short-termism is the enemy of everything that counts in the business world. Investors want decent corporate reporting that encourages long-term strategy and profitability.

Only the investment banks stand to gain from a short-term view because it gives them the leverage to sell their products. And we all know, post-Enron, where that road leads.

Quarterly reporting increases a short-term outlook. No matter how often CEOs and CFOs look at the stern rebuke from the EC about not being led astray, they will always find themselves needing to ramp the price to suit expectations and then, when audited figures have to be produced at year-end, they will have some really hairy fancy footwork to do. This has absolutely nothing to do with ensuring that companies can be trusted by investors and can be relied upon to look to the long term.

In the days when I was accountancy editor at The Times, I often used to take a shortcut to the office at Wapping. It took me past the marina at St Katherine’s Dock. There, by one of the quays, was often one particularly large and luxurious yacht. Its name, doubtless intended humorously, was Fourth Quarter.

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