The view that publishing quarterly earnings statements encourages short-termism in business is becoming increasingly widespread. Unilever CEO Paul Polman himself has stated his belief that ‘quarterly capitalism’ is behind many of the problems in today’s world.
Unilever has moved away from quarterly reporting, and other companies have followed suit. Indeed, the Financial Conduct Authority removed the obligation for listed groups to publish these interim statements in November last year. Since then, the likes of National Grid have dropped the practice in a move towards a more long-term business philosophy.
Polman told Mckinsey that while this new approach is more conducive to sustainable economics, it has also helped his company grow too: “The share price may have fallen on the day we announced an end to guidance but is now 35 per cent higher. Nothing in the intervening two years has persuaded me that this was the wrong thing to do.”
Experts point out that investors’ pursuit of short-term gains, encouraged by quarterly reporting, holds companies back from following longer-term strategies that create more value for the company itself, and have the potential to improve their social and environmental impact. It is also argued that the market becomes more volatile when subject to short-term pursuits.
Mckinsey’s managing director Dominic Barton is firmly behind a renewed long-term form of capitalism. He told Harvard Business Review: “Now that the worst seems to be behind us, it’s tempting to feel deep relief—and a strong desire to return to the comfort of business as usual. But that is simply not an option.”
The likes of Barton want to see management incentives that encourage foresight, as Polman put it, “a broader form of stakeholder capitalism”.
More companies abandoning quarterly reports could accelerate this shift, while creating more value for investors and helping to stabilise the economy.
Karen Jeffrey, researcher at the New Economics Foundation, told Salt:
“Short-termism, whether it’s in government or big business lies at the heart of many of today’s most pressing problems. Climate science couldn’t be clearer about what future awaits us if we do not take action, and with dramatic environmental changes come energy crises, insecure food supplies, and price shocks. A move away from ‘quarterly capitalism’ could free up businesses to play a more active role in finding long-term solutions to our shared challenges.”
“It is encouraging to see the likes of Unilever recognising the limits of some of our most prominent economic measures. For a company to perform well means more than simply profit. Organisations should be judged according to the impact they have on society as well as on their bottom line.”
However, according to Chris Nichols, founder of the strategic provocateur hub www.gameshift.co.uk and of the Ashridge MSc in Sustainability & Responsibility, there are more deep-rooted issues that need to be addressed.
He said: “I don’t see quarterly reporting per se as the chief problem. The strategic issue is the nature of the investors. If your investors are anonymous traders buying and selling stock with an average hold time of less than a minute then there is no way that a long-term strategic investor relationship can exist. This is a deeper issue than the periodicity of reporting.
“Investors will be patient if they are backing a longer story they accept and that has credibility. These investors will not be concerned about quarterly forecasts.
“I talk to many CFOs who feel they have no degrees of freedom. They may have high ideals but they find that analysts and investors aren’t interested in anything other than the dividend path and the growth story. Again, this is an issue of who you have as your investors.
“We do not have to settle for the investors we have. You can set out to chose your investor base and find the investors suitable for your strategy. If the story makes sense, the right investors with the right ethics and appetite will come.”
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