Interim review of UK equity markets finds issuers and investors opposed to the practice
There is widespread opposition to quarterly reporting in the UK, according to the initial findings of a report into the country’s equity markets.
The Kay Review, commissioned by business secretary Vince Cable in June 2011, released an interim report yesterday that reports general unhappiness with the requirement for quarterly market updates.
‘A large majority of respondents, whether they represented companies or investors, considered that quarterly reporting and interim management statements fell into the category of useless or misleading information,’ states the report.
Respondents said quarterly reporting is burdensome to conduct and encourages companies to focus on ‘making the numbers’ rather than working toward long-term goals.
No recommendations at this time
The interim report does not make any recommendations at this stage and will form the basis for further discussion. A final report is due for submission in the summer.
Industry bodies immediately welcomed the report’s findings on quarterly reporting. The Confederation of British Industry (CBI), an influential lobby group, says the report is right to identify that quarterly reporting should go.
‘It is onerous for companies and adds little value for most investors,’ comments Matthew Fell, the CBI’s director for competitive markets, in a prepared statement.
Kay speaks out
Professor John Kay, author of the report, came out in strong opposition to quarterly reporting in a column published in the Financial Times yesterday, saying it produced a ‘dysfunctional’ relationship between companies and sell-side analysts.
‘The tyranny of quarterly earnings has created a dysfunctional cycle of smoothed and exaggerated numbers and relations between companies and analysts based on earnings guidance, an activity almost unconnected to the real business of the company and to assessing its progress,’ he said.
He added that the European Union is now ‘engaged in the slow process of removing this requirement’.
This is a reference to a move by the EU to lift the requirement for quarterly reporting via the Transparency Directive, which set common guidelines for European companies on disclosure and was implemented in the UK in 2007.
It requires companies to produce two financial reports and two interim management statements per year.
Review has wide focus
The Kay Review was commissioned to examine whether equity markets are fulfilling their role of supporting long-term growth and good governance at UK companies.
It is considering changes in areas such as corporate governance, market structure and the investment industry.
The report also notes frustration over executive pay and concern about high-frequency trading (HFT). While some respondents praised HFT, says Kay, the majority were skeptical of its benefits.
The report pulls out a comment from Aviva as a representative response: ‘[W]hile some argue that spreads have reduced as a result of this activity, in reality the extent and depth of liquidity they really represent is questionable.’
