Stockholm (NordSIP) – Management, as is also the case in other broader economic matters, is often concerned with balancing disparate needs. To solve these issues known as the principal-agent problem, creating incentives to align managers’ interests with those of the shareholders (of public companies) is often the go-to answer.
Typically, shareholders (the principals) want their investment to create a return and grow in value. Having delegated the running of the company to management (the agent), they want to avoid shirking and the ensuing erosion of the company’s value. For this reason as well as to enable regulatory oversight, publicly listed companies are required to report financial performance on a quarterly basis. However, this solution creates its own set of problems; not least of which short-termism, a bane of sustainable investors, who wish to focus on long-term investments that generate value while preserving the integrity of our ecosystem, the welfare of workers and the wellbeing of communities and consumers.
This is the issue that Norges Bank Investment Management (NBIM), the world’s largest sovereign wealth fund, seeks to tackle in a recent Asset Manager Perspectives publication on Corporate reporting frequency and long-term value creation. The paper discusses the impact of high-frequency corporate reporting on long-term value creation from an asset manager’s perspective. “We argue that mandatory quarterly reporting, and the associated pressure on management to meet earnings guidance, can lead to short-term decision-making. This hinders sustainable growth and innovation, and may deter companies from accessing public markets,” NBIM explains.
The article is divided in five main sections. The first section after the introduction reviews the impact of the quarterly reporting cycle on capital markets. The next section examines various jurisdictional approaches to reporting frequency, noting a trend towards deregulation of quarterly reporting to encourage long-termism and reduce reporting burden. This is followed by a consideration of the use of financial reports by stakeholders and by a discussion of the advantages of optimised reporting frequency. “Institutional investors, such as pension funds and sovereign wealth funds with patient capital, can support management in realising a company’s long-term growth potential. Their sector expertise allows them to take contrarian views and invest in companies that may be less profitable in the short-term but offer long-term compounding potential,” the paper notes.
The paper concludes with recommendations for optimising reporting frequency, alongside high-quality corporate disclosures, to achieve sustainable financial outcomes for companies, investors, and the broader economy.
“The paper proposes a shift towards higher quality semi-annual reporting, supplemented by continuous disclosure of material information, to better align managerial and investor behaviour with long-term investment and value creation. The paper also highlights the benefits of high-quality corporate reporting in providing transparency, enhancing investor decision-making, and supporting companies’ long-term strategic planning,” NBIM concludes.
