Elon Musk got himself in hot water with regulators this summer by tweeting his intent to take Tesla private while lacking the means to follow through. His desire was fed by the constant glare of Wall Street analysts and what’s generally called “short-termism” in investing circles. Musk was done with what he saw as “boring, bonehead questions” on the company’s conference calls and the stress of trying to meet his own lofty near-term forecasts.
Around the same time, Donald Trump tweeted that, based on the advice of top business leaders, he had asked the SEC to study whether companies should move to semi-annual reporting from quarterly reporting, citing the potential benefits of greater flexibility, lower costs and more jobs.
A few months prior, Warren Buffett and JPMorgan Chase CEO Jamie Dimon penned an op-ed in the Wall Street Journal imploring companies to issue less quarterly guidance.
Whether it’s providing less guidance, reporting results less frequently, or going private, the intent is all the same—to move away from short-term tactics that aim to hit quarterly goals in favour of longer-term strategic moves.
As Buffett and Dimon put it, “Companies frequently hold back on technology spending, hiring, and research and development to meet quarterly earnings forecasts that may be affected by factors outside the company’s control, such as commodity-price fluctuations, stock-market volatility and even the weather.”
The argument to reduce short-termism is nothing new. Buffett wrote to Berkshire Hathaway shareholders in 2000 that he had “observed many instances in which CEOs engaged in uneconomic operating maneuvers so that they could meet earnings targets they had announced.”
Buffett and Dimon stop short of suggesting that companies report less frequently, explaining that they should “continue to provide annual and quarterly reporting that offers a retrospective look at actual performance so that the public, including shareholders and other stakeholders, can reliably assess real progress.”
Cutting down on guidance and short-term goals offers a middle ground. Escaping the market’s focus on whether companies hit or miss guidance frees up executive attention and capital allocation. Yet, companies don’t need to go so far as cutting reporting frequency, which would create an information void inconsistent with public market expectations for timely information.
Some companies have stopped providing earnings guidance, or have made other moves to break the cycle that closely ties their share price to the analyst reports that follow on the heels of company results. Constellation Software stopped holding conference calls with analysts this year, preferring to publish periodic answers to chosen questions online. The company was diplomatic in its reasons, citing more equal and timely access to information, but management likely saw the calls as a waste of time, with analysts asking redundant, knee-jerk questions four times per year.
The reason there is little consensus on how to optimize corporate forecasting and reporting is because different approaches fit companies in different stages. This was spelled out in a 2006 report from the CFA Institute, “Breaking the Short-Term Cycle.” According to the paper, smaller-cap companies that are raising funds and growing quickly, or that otherwise need to prove themselves, are more likely to see a need for earnings guidance. On the flip side, larger-cap, established companies with proven track records and slowing growth have little need for earnings guidance—companies like Constellation Software.
Conversely, Tesla would benefit from providing guidance with its fast growth, cash flow problems and need to raise significant capital. The problem is that its CEO tends to issue aggressive short-term targets that the company fails to meet. Given the conundrum, it’s little surprise that the board may be entertaining the idea of privatization.
In the end, there’s no one-size-fits-all approach that will work to address short-termism, and companies are better off with the flexibility to decide what strategy works best for their shareholders. While some advisors might be hoping for a less frequent corporate reporting cycle, and a reprieve from the accompanying deluge of analyst research, there’s little hope of significant change on the horizon.
Al and Mark Rosen run Accountability Research Corp., providing independent equity research to investment advisors across Canada. Dr. Al Rosen is FCA, FCMA, FCPA, CFE, CIP and Mark Rosen, is MBA, CFA, CFE.