Debate: Should we be worried about short-termism?
23 March 2020: is it the right moment to ditch quarterly reporting at a time when the public and shareholders need to rebuild their trust in business and financial markets? We find out
Heath Drewett, Chief Financial Officer, Aggreko“Investors react to soundbites, rather than taking the time to understand fundamentals”
The wider external context within which we operate is a world that is increasingly short term in its needs and perspectives. Day-to-day share price movements are more significant than they were 10 years ago when I first became a CFO. The market has got itself into a cycle of short-term overreaction to news of movement both up and down.
The introduction of interim management statements hasn’t helped drive longer-term shareholder thinking. The result has been more short-term responses from the market. This has quietened a little as many companies have significantly pared back the data they provide in the first and third quarters, which limits the reasons for increased trading activity around these short-term trading updates. We, like others, have dropped our first quarter statement.
Investors’ short-term decision-making isn’t helped by a lack of time to do their homework on companies. As a consequence, investors react to soundbites and summarised snippets of news, rather than taking the time to understand the fundamentals of the business and the longer-term opportunities and risks of the investment.
Encouraging longer-term thinking and behaviour among shareholders is about trust. If shareholders believe in the company’s strategy and trust the management team, they are more inclined to ride out the odd bump in the road and take a longer-term view as to the prospects of the business.
No one likes surprises, not least shareholders. So, it is beholden upon the business, and the CFO in particular, to help build this trust with shareholders and potential investors through clear, transparent and candid reporting. If companies and management teams want to change investors’ short-termism, they have a responsibility through their ongoing reporting and shareholder engagement to build understanding of their businesses and trust in their ability.
Suzanne Baxter, Independent Non-executive Director at the Equality and Human Rights Commission and Audit Committee Chair of WHSmith
“Promote a balance of long-term preparedness and short-term return”
It’s a well-worn adage that tells us we shouldn’t spend time worrying about things we can’t control – and such is the case in the current, uncertain environment with short-termism. At a macro level, we live in times of changing political backdrops, rapid technological change, activism, challenging trading conditions and evolving social norms.
To ignore those trends and fail to capitalise on any opportunities they provide would be bad business in anyone’s book. Focus on short-term targets is part and parcel of doing business on public markets, especially in a fast-paced world of change. Some investors want quarterly updates to manage their returns. But employees or other stakeholders want to know how the business is doing too.
Of course, it’s all about balance. Investors and boards should seek to ensure that the management of short-term pressures and opportunities doesn’t undermine the pursuit of long-term strategic plans. It was ever thus. Post-event analyses of economic crises speak of the perils of failing to balance long-term planning and risk management with the benefits of short-term transactional gains and the servicing of near-term incentives.
Good management and the critical eye of strong governance should steer organisations away from repeating such practice, promoting an appropriate balance of long-term preparedness and short-term return.
Marion Plouhinec, Senior Global ESG Analyst, Legal & General Investment Management
“We are operating in a time when there is much more attention being paid to the creation of value over the long term”
Our view is clear: we do understand that every company is different and each operate in different short and long-term cycles; and we recognise that it’s for the management to make the appropriate judgements on the frequency of reporting.
But if you take a look at the last set of data on this in 2017 you would find that almost 50% of FTSE 100 companies and 60% of FTSE 250 companies were no longer issuing quarterly reports. That figure is likely to have risen since then.
And although when management feels it’s appropriate to issue short-term updates we should let them continue if they think it’s right, we are operating in a time when there is much more attention being paid to the creation of value over the long term. And we feel to ask senior management teams of companies to focus on long-term value creation and then demand that they demonstrate improvements quarter after quarter isn’t really compatible with a long-term investment environment.
The question of trust is really important here: trust in management, trust in markets. We need to trust management to make the right decisions for the long-term health of the business.
And we feel that by encouraging longer-term thinking then it will benefit everyone. If we reduce the amount of time management has to spend on reporting - something that ultimately adds little to the business - then it can spend more time not only running the business but also articulating the strategies, market dynamics and innovation drivers. Those are the key metrics that drive long-term shareholder value.
Ultimately, meaningful change for a company takes quite a few years and can’t be achieved over a short time period.