British market reformer urges end to quarterly company reports

British government adviser says the practice leads to focus on short-term profits while deals that bring long-term growth are neglected

PUBLISHED : Tuesday, 09 April, 2013, 12:00am
UPDATED : Tuesday, 09 April, 2013, 4:40am

A British government-appointed reformer wants to see mandatory quarterly reporting for companies abolished to stop "a culture of short-termism".

Professor John Kay, who was asked to chair the review of British equity markets, has proposed the scrapping of mandatory quarterly reporting.

Mandatory quarterly reporting should be gotten rid of because such a requirement has led executives of companies to focus on producing earnings on a three-month basis
Professor John Kay

"Mandatory quarterly reporting should be gotten rid of because such a requirement has led executives of companies to focus on producing earnings on a three-month basis," Kay told a lunch meeting in Hong Kong hosted by the Chamber of Hong Kong Listed Companies.

He said quarterly reporting, together with the current executive pay structure in the form of bonuses linked to profitability, had led the management to focus excessively on producing short-term profits by making some unnecessary deals while neglecting profit that might bring long-term growth of the companies.

"Company executives should be paid by salary only," Kay said.

If a bonus was paid, it should be in the form of shares that the executives could only sell after their retirement, he said.

He also recommended a change in rules to allow shareholders to vote on executive pay.

Kay said for investors, "the quality of the information is more important than quantity or frequency".

The British government is working with its counterparts in the European Union to study how to implement Kay's proposals.

Mandatory quarterly reporting, a requirement widely imposed in the United States, Singapore, mainland China and many European countries, has long been seen as good corporate governance practice because it gives frequent financial updates to investors.

Britain's quarterly reporting works differently as it allows companies to give only management updates and not figures in the first and third quarters between announcement of half-year and annual results.

In Hong Kong, main-board companies only report results every six months. The city is also among the few advanced markets not to have any format of quarterly reporting.

The stock exchange has gone through two rounds of consultations on quarterly reporting in the past 10 years but failed to introduce the rules as many companies fear it would add costs and lead them to chase short-term profits.

Patrick Rozario, a director and head of risk advisory services at accounting firm BDO, however, said quarterly reporting would be useful for investors.

"Some companies do not have many announcements between their interim and annual results. It would be important for investors to have more frequent updated information to decide if they want to invest in the companies," Rozario said.