Plenty of people who have studied the issue of quarterly reporting find that it places an unhealthy emphasis on meeting or exceeding forecasts. The entire history of guidance and so-called whisper numbers reflects this short-term emphasis, as opposed to managing a company to thrive over the long-term.
Consider Amazon: It has continuously invested in expanding into new markets and new technology with little regard for quarterly profits; indeed, CEO Jeff Bezos outlined this long-term focus 20 years ago in his first letter to his shareholders. Compare this to General Electric Co., whose unhealthy obsession with beating expectations by a penny a share during the 1990s made the company look far better than it really was. Since that time, accounting fraud, executive turmoil and subpar performance have led the company to shed almost businesses amounting to two-thirds of its market value.
I've also seen first-hand what the pressure of quarterly reporting does to a company. Some years ago, I worked at a firm that reported on its investment performance each quarter. Preparing the documents for all of the numbers was a huge deal. Each client household would receive a full “dead tree, snail mail” update: Multiple accounts, benchmarks, capital additions or withdrawals all had to be accounted for. Sometimes the portfolio beat the market, often it did not. After the personalized report would go out, the phones and email would light up with questions.
The focus on those numbers every three months was an unhealthy obsession among clientele and staff alike. I wanted to avoid that issue when we launched our firm. Working with a software vendor, we give every client an application that allows them to see exactly how well they have done on a daily, weekly, monthly, quarterly and annual basis. It's updated daily. Maybe one day it will be in real time.
Once daily access to performance data became available, people stopped caring about quarterly numbers. The unhealthy short-term obsession simply disappeared, replaced with a simpler but more important question: “Am I on track to meet my longer-term goals?”
Changing the reporting conventions of U.S. corporations would do the same thing. Maybe a transition period would be needed, with monthly reporting. The frequency would reduce the chance for big surprises and disappointments. As technology and reporting systems improve, the numbers could be reported daily.
The bottom line is so obvious: To make quarterly earnings less important, we should be exploring ways to report results more often, not less.
This column was provided by Bloomberg News.