In my previous blog, we talked about the 35,000-foot view of companies over-focusing on quarterly reporting and cultures of growth. It’s not necessarily a bad thing, although it does have implications for how businesses are run and how decisions are made. Quickly now I wanted to look at how we arrived here, and some potential solutions (or maybe “adjustments” is a better word) for the future.
How we arrived here with quarterly reporting
Quarterly reporting is often done via Form 10-K in the United States, which has its initial origins in the Securities Exchange Act of 1934. In other words, the system is older than WW2. The Securities and Exchange Commission (SEC), also created in that 1934 legislation, has the ability to end quarterly reporting as normative in the U.S. -- and it has apparently wrestled/danced with this decision a few times. (The most recent seems to be mid-2016.) Companies in the U.S. that are publicly-traded cannot opt out of quarterly reporting, but there are loopholes around how they have to present their information if they choose to opt for those.
Reporting vs. forecasting
This is an important distinction. Quarterly reporting is, well, just how it sounds: the reporting out of financials from the previous three months. Quarterly forecasting is the inverse process: it looks ahead, and a finance/accounting team attempts to determine needs for the upcoming quarter (or several quarters down the line). The context of the time interval is different, obviously; and forecasting would never be eliminated in a company -- people who run companies want to have a hold on potential future spend.
Is there a problem with quarterly reporting, though?
This is a nuanced issue.
If you’re in the camp of “Yes, it’s a problem,” your common arguments are usually myopia in decision-making and too much of a focus on growth as opposed to real, hard-earned profit. Daniel Kahneman, among others, have shown that decision-making in large organizations is usually not ideal -- and a consistent short-term focus typically makes it less ideal. Om Malik, the founder of GigaOm, has also written about these issues: short-term focus and “growth above all else” harm long-term decision-making. A typical example is a company slicing research and development budget (a long-term value) for more stock buybacks (a short-term value). This makes their numbers look better but doesn’t necessarily set them up for the future as well.
If you’re in the camp of “no, it’s not a problem,” there are solid arguments on your side as well. Herb Greenberg, a financial journalist with Pacific Square Research, said of the last time the SEC mulled eliminating quarterly reporting: “That’s the stupidest thing I’ve ever heard.” Hilary Eastman, the Director of Investor Engagement for PwC, has said the focus on quarterly reporting is treating the symptom as opposed to the cause. In her view, we need better information on where companies stand and the decisions they’re making, not less information under the guise of supposed long-term strategic thinking.
A reasonable bottom line on these issues
Any discussion of short-term vs. long-term decision-making options is typically still revolving around cost and cost-cutting, as that’s how much business is still shaped. But maybe that’s the real issue. From a Digital Tonto article called “Technology’s Moral Crisis:”
Yet Josh Sutton, who leads the data and AI practice at Publicis.Sapient believes that many of these concerns are overblown. “I actually think cost is the worst reason to invest in automation, because the companies that are able to thrive 10 or 20 years from now will not be the ones who cut costs but those that transform business models. You have to be looking to bring your organization up a level.”
So maybe it doesn’t truly matter whether you focus three months at a time or three years at a time -- maybe the business winners of the future will be those who attempt to shift their entire paradigm, as opposed to simply cutting costs to “win a quarter.”