Recently, I wrote a blog about transaction taxes on high frequency trading that referenced the Kay Review. This is a study done on behalf of the UK government to examine equity market participation and long-term perspectives. One of the most frequently heard criticisms of the equity market is that it is too focused on short-term results.
While I agreed with the view that HFT could and should be taxed, the Kay Review has other areas in which I disagree with the author’s reasoning. One key area is the utility of quarterly reporting. The Kay Review comes down against interim reporting in no uncertain terms, and the follow-up panel agrees.
We support Professor Kay’s recommendation that the requirement for quarterly reporting should be removed and recommend that the Government now outlines a clear timetable to implement this recommendation including what alternative strategies would be followed in the absence of any change in EU law.
To my mind, Kay and the review panel are focused too much on the problems created as a side effect of quarterly reporting, while forgetting why we have quarterly reporting in the first place. Investment decisions need visibility into the firm.
Assume that across the broad spectrum of market participants decisions have to be taken at random points during the year. If a company only reported annually, the decision would have to be taken with information that is on average six months old. With quarterly reporting, that drops to 45 days, on average. Bad news doesn’t age well.
How well is a company management handling its annual operating cycle? Do I find out once a cycle or four times a cycle? Did cost cutting, discounts, or new products help, or were they a disaster?
Not so long ago, it was quite fashionable to call for executive compensation to be tied to corporate performance. Be careful what you wish for, you just might get it. The take away lesson isn’t that quarterly reporting is evil, it isn’t. It is that executives, like everyone, will optimize what you compensate them for. Grant them options and they will aim for the strike price.
What is needed is not less reporting. What is needed is more nuanced reporting of the entire ESG suite of metrics, as well as long-term goals, reported against frequently. If you look at any project management methodology, it will call for frequent reporting to project stakeholders. A ‘project’ called a company is no different.