The years after the financial crisis have seen a renewed focus on long-term value creation among investors, regulators, and—as a result—management teams. These years have also seen a heightened compliance burden for public companies, with regulators introducing new measures to tamp down systemic risk.
Earlier this month, the Canadian Securities Administrators (CSA) published a paper seeking comments on a number of new ideas to reduce the regulatory burden on Canadian public companies. Perhaps the boldest is the proposal to lift the requirement that Canadian public companies issue quarterly financial reports, and to allow them to report semi-annually.
The authors support this proposal. It alleviates pressures that encourage short-term thinking. It reduces the compliance burden for companies. And it mirrors the choice made in many comparable markets, including the UK, the EU, and Australia.
The argument for this change starts from the premise that a long-term focus is preferable to a short-term one. The debate over time horizons has generated a volley of arguments and academic studies on either side. Some strong new evidence, though, suggests that companies that manage for the long term deliver better returns over time. New research from McKinsey finds that between 2001 and 2014, companies that managed for the long term saw average revenue and earnings growth that were 47% and 36% higher, respectively, than those that did not.
But simply consider what prominent investors are saying. Few—including our firm's many shareholder activist clients—would proudly declare themselves short-termists. Many are concerned about what BlackRock CEO Larry Fink has described as "quarterly earnings hysteria," instead encouraging firms to focus on creating long-term value.
While one might think that investors would universally oppose measures that could result in less information being released, this has not been the case. Some have demanded the end of quarterly reporting. For instance, the UK's Investment Association—the industry association for UK investment managers—has recently called for large UK companies to stop reporting quarterly, or else explain why they continue doing so.
How does ending quarterly reporting encourage long-termism? Intuitively, it makes sense that absent the rush to meet quarterly earnings, managers will no longer feel as compelled to take short-term measures that might damage long-term value; to prefer an asset sale to a capital investment, perhaps. There are also data to support this proposition. One study that looked at US data from 1950-1970—a period in which many companies began to report more frequently—found significant declines in expenditure on fixed assets when companies increased reporting frequency.
Just as importantly, this move would walk back the increased compliance burden Canadian companies face. By global standards, Canada is a mid-market economy. The costs of producing quarterly reports, and of having armies of lawyers and accountants pore over them, have become staggering. Ending these reports would free significant corporate time and resources, benefitting the equity markets and broader economy.
It is small wonder that Canada's IPO markets are becoming relatively parched. Figures from the University of Calgary show an average of 15.9 TSX-listed IPOs a year by operating companies between 2001 and 2015, compared to 41 a year on average between 1993 and 2000. Faced with the prospect of having to produce extensive quarterly reports, it is understandable that many growing companies are preferring private exits to public listings. Even many advocates of maintaining quarterly reporting would concede that much of the information in quarterly reports beyond topline earnings numbers is duplicative or largely irrelevant to investors.
In considering these issues, Canada has much to learn from the experience of other jurisdictions. In 2007, the UK mandated quarterly reporting. But a subsequent government review recommended abandoning this requirement, finding "wide consensus among respondents" that "quarterly reporting and the preparation of interim management statements have adverse effects on the behaviour of companies and investors." This recommendation was implemented in 2014. In 2013, the EU moved to drop quarterly reporting requirements, which are now no longer in place. In Australia, companies normally report semi-annually.
To be clear, if companies can decide whether to report quarterly, for many it may remain appropriate to report at least some figures quarterly. For example, where companies can expect large seasonal spikes in revenue, as in retail and tourism, quarterly reporting may be more suitable. Companies should remain alert to what competitors are doing and investors expect.
Fear of analyst reaction, and the fact that the US maintains quarterly reporting—at least for now—might make some companies think twice about going semi-annual. But these potential obstacles simply call for boldness and leadership from Canadian companies and commentators who want to make a longer-term focus and semi-annual reporting the norm.
It is also important to remember that there are extensive continuous disclosure requirements under securities laws, which require reporting of material changes. While these may be worth tweaking if semi-annual reporting is allowed, the argument for abolishing quarterly reporting is not an argument for allowing companies to submerge beneath the waterline, only surfacing to communicate with investors at six-month intervals.
We welcome the CSA's proposals to reduce the regulatory burden on companies and the debate that will occur over the months to come. We believe that debate will show that in the effort to reduce regulatory burden and fundamentally rethink the purposes of our securities regulations, scrapping the quarterly reporting requirement is a good place to start.
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