November 13, 2015

(Further) Examining the Quarterly Reporting/Short-Termism Link

With the increasing focus on minimizing short-term thinking and behaviors that might overshadow due consideration for behaviors that drive long-term value has come a debate about whether and to what extent quarterly earnings reporting contributes to – or promotes – management’s focus on the short-term. Regardless of which side of that debate you fall, this recent Harvard Law post suggests some thought-worthy considerations relative to quarterly vs. semiannual reporting, along with a new “middle ground” position consisting of quarterly earnings releases/calls bolstered by two streamlined quarterly reports sandwiched between a detailed 10-K and semi-annual report.

Considerations: Quarterly vs. Semi-Annual Reporting

  • Will replacing quarterly with semi-annual reporting really induce corporate executives to make longer-term business decisions? For example, would that sort of change elicit notably more new five-year investment projects?
  • Will earnings smoothing (to the extent this is an issue generally) occur in six-month intervals rather than three-month intervals if quarterly reporting is eliminated in favor of semi-annual reporting?
  • If the time period betwen earnings reports is elongated, will the gap between actual earnings and management’s projections similarly widen, thus triggering undesirable consequences (e.g., more pressure to smooth earnings)?
  • Would the opportunity and temptation for insider trading increase with a longer time period between management’s reporting out?
  • If mandatory quarterly reporting were eliminated (like it is in the UK) and some companies elect to report quarterly while some elected only to report semi-annually, would this disparity negatively impact investors’ need/desire for comparability among investments?

See my previous blog on the Push Toward Elimination of Quarterly Capitalism, Broc’s recent blog on Top Pet Peeves for Earnings Releases, and these recent articles and posts:

Is Short-Term Behavior Jeopardizing the Future Prosperity of Business?
Quarterly Financial Reporting is Needed, Productive, And Good
Is the Sun Setting on Earnings Season?
Time to End Quarterly Reports, Law Firm Says
Legal & General’s Call for an End to Quarterly Reporting

SEC’s Investor Advisory Committee Members Oppose FASB’s Materiality Proposals

At last month’s Investor Advisory Committee meeting, several IAC members reportedly voiced their objections to FASB’s recent proposals aimed at clarifying the concept of “materiality” for financial disclosure purposes to comport with legal standards. Among other things, some members reportedly perceived the proposals as an effort to reduce disclosure and expressed concerns that the proposal would effectively place disclosure decision-making within the purview of lawyers, who (they claim) tend to err on the side of “less is more” disclosure and regard disclosure of non-material (based on the legal standard) information as potential liability risks.

See Cahill Gordon’s recent post – which does a nice job of explaining the rationale for FASB’s sound (in my view) approach, and this WSJ article.

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– Study: Director Age & Tenure on the Rise
– CEO Evaluations: Majority Assigned to Compensation Committees
– Breaking the Silence on Quiet Periods
– Survey: Directors Favor Evaluations for Succession
– Audit Committees: Establishing an Effective Whistleblower Program


– by Randi Val Morrison