Eyebrows were raised in July when Porsche, the family-run German car manufacturer, failed to meet the deadline for submitting quarterly results for the first time. Particularly when the reason for the failure became clear. It wasn’t a lack of numeracy among the company’s executives. And it wasn’t the fault of shoddy administration either. No. Porsche didn’t deliver its quarterly results because it didn’t want to.
It’s not as if the Deutsche Börse’s rules weren’t clear. Fail to submit quarterly results on time and you risk expulsion from the indices. And the exchange was as good as its word: Porsche has been deleted from Mdax. But it remains defiant.
Porsche’s point of principle is clearly at odds with a global trend. In the US, of course, quarterly reporting is nothing new. And Europe is also grasping the nettle. In the UK, companies that list on the main market with less than two years’ history – including most dot-coms – are obliged to report quarterly, as are those with a US listing. In Germany, starting in 2001, the Deutsche Börse has required that all Mdax and Dax30 companies submit quarterly reports.
And the shift to quarterly reporting could soon apply to more of the continent if the European Commission plows ahead with its planned changes to company reporting rules. The commission has published a report examining the issue of corporate transparency that proposes that listed companies adopt quarterly reporting [see Stirring up transparency, page 39].
Asia is not ignoring quarterly reporting either. In Hong Kong, the Securities and Futures Commission and the Stock Exchange of Hong Kong are collecting information on relevant regulations and practices in other major financial markets with respect to quarterly reporting. The findings will form part of a public consultation on a review of listing rules later this year and hot debate is expected over the pros and cons of this change, in particular the financial impact on listed companies and the benefits to investors and the market as a whole.
The reasons
So what is Porsche thinking of, bringing about its own expulsion?
Well, for a start, Porsche is in a position of relative comfort. Few fund managers orientate their portfolios using the Mdax. Beyond that, it is thought that the loss will be greater for the mid-cap index itself than for the company, which is one of the most significant firms listed on the Mdax and the world’s most profitable car-maker. Wendelin Wiedeking, Porsche’s chief executive, has explicitly said the group cared as much about being part of the Morgan Stanley Capital International index – which it joined earlier this year – as the German index. And should Porsche be ejected, ‘We do not anticipate any risks for our shareholders or for the further stock price development’, he said.
Regardless of the reasons for the rules, in times when profit warnings are not infrequently given in quarterly reports, don’t investors have a right to greater transparency? Such disregard for the push for transparency seems to be out of character for a company that excels at investor relations. This year Porsche won the award for best communication of shareholder value at the Investor Relations Magazine Euro Awards. The company is clearly no slouch when it comes to shareholder communications. So why did it refuse to adopt quarterly reports? Would it really be a chore?
Altruism
Publicly, Porsche questioned the worth of the quarterly reporting rule. It asserted in a statement that quarterly reports were ‘foremost a plan to drum up business for Deutsche Börse and the banks. We would have appreciated it if the Deutsche Börse had acknowledged its true motives in this matter.’
But the reasons for Porsche’s antipathy toward the idea go deeper. For a start there’s the financial aspect to consider. ‘The costs are significant,’ says John Pierce, chief executive of the Quoted Companies Alliance (formerly Cisco), a UK organization that safeguards the interests of smaller listed companies. ‘We’re talking about £1,000 (€ 1,600) for each audit. So the introduction of quarterly reporting will cost at least another £2,000 (€ 3,200) a year. And,
for small-cap companies that really is an added cost that they could well do without.’
Fair enough, but that can’t be the primary reason. At the end of Porsche’s explanatory statement to investors, it announced that it had made record profits for the year up to July. It couldn’t then quibble over a couple of grand, could it?
Of course not. Instead, the company points to more altruistic reasons. ‘Over-frequent reporting can mislead investors,’ says a spokesman for the company. ‘It can draw attention away from the long term towards the short-term thinking of the stock market.’
The fact that Porsche isn’t alone in its anti-quarterly stance gives this argument greater credence. Indeed, many people agree that quarterly reports do not improve investor relations and confuse rather than help shareholders in assessing the state of the business in cyclical industries.
Like Porsche, the UK insurance group CGNU has bucked the trend towards greater disclosure by scrapping quarterly reports in favor of traditional twice-yearly statements. It claimed that the cost of producing the reports every three months was not justified, but, again, this wasn’t the main reason.
‘There have been some expense savings,’ admits Steve Riley, the company’s director of investor relations. ‘But the real point is that this enables us to move forward strategically instead of focusing on coming up with the numbers every quarter. In fact, strategy was the main reason for the change.’
Hybrid solution
Riley suggests that the change is not as extraordinary as Porsche’s refusal to report, and points to recent changes within the company as justification for the decision. ‘The group is a merger of two insurance companies: CGU and Norwich Union,’ he states. ‘CGU always reported on a quarterly basis because of its large general insurance business and its large exposure in the US. Norwich Union was a large life insurance business and so it always reported half-yearly. After the merger in May 2000, CGNU went into the life sector. We also sold the US business so the split was two-thirds life and one-third general insurance. And after a period of review, it was decided to move our reporting into line with the life sector. Our reporting basis is something of a hybrid, though – we report half-yearly but disclose our new business sales and margins quarterly.’
Life insurance – like the automotive sector – doesn’t follow quarterly cycles. And so, the argument follows, quarterly reporting for these companies is both useless and damaging. ‘Many companies go through cycles that are longer than a quarter of a year so a three-month cycle is too short a time to gauge any meaningful change in the company,’ says Pierce.
The controversy
Certainly, this was similar to an argument employed by Porsche, although it has provoked frustration in some quarters. ‘It’s silly that they don’t consider us intelligent enough to see through cyclical swings. They’re common to the whole industry,’ scoffs one UK-based sell-side analyst.
The QCA, meanwhile, sees a danger in quarterly reporting.
‘It could easily encourage greater short-termism in investors,’ says Pierce. ‘That is extremely worrying because for smaller companies, volatility is enough of a problem as it is.’
Pierce recognizes that volatility can have a positive flip side and that the activity prompted by periodic reporting is not all bad.
‘I suppose there is another side of the coin,’ he says. ‘If you look at the pattern of share dealings around results announcements – either annual or half-yearly – you’ll see a flurry of share dealing. People say that if you oppose the introduction of quarterly reporting, you’re talking yourself out of more dealings in your shares, that is, that quarterly reports boost liquidity. So there are two sides to the argument.’
That doesn’t sway the QCA’s membership, though. ‘We conducted a survey of our members [about the European Commission’s paper] and the response was a clear and resounding no, we don’t want quarterly reporting. Of the people that responded, that opinion was held by pretty much 100 percent of them. I should point out that these are not Luddite reactions. These are genuine concerns. There’s a lot we don’t know – will the results be numbers only? Or will a director’s report be required? These questions will affect the workload of companies.’
Pierce’s view is that a broad brush stroke across the whole of Europe is somewhat Draconian. ‘There is an underlying movement in Europe – and a lot of what the European Commission is doing is driven by this – towards greater investor protection. Of course, the UK is quite far ahead of continental Europe in this respect, so perhaps this particular proposal isn’t necessary.’
Still, these arguments ring hollow if investor confidence is being eroded by the avoidance of more frequent reporting. And the investment community does appear to prefer quarterly reporting.
‘The trend is definitely towards quarterly reports throughout Europe,’ says Michael Crawshaw, co-head of European equity research at Schroder Salomon Smith Barney. ‘The general consensus among investors and analysts is that regular disclosure of information decreases volatility, and that long periods of silence followed by interim disclosure increase volatility. Some companies claim that quarterly reporting increases volatility but, from our point of view, we don’t really know what they’re talking about.’
Furthermore, some analysts feel that the lack of quarterly reporting reduces transparency, which most European companies are seeking in order to acquire more credibility with US investors.
CGNU’s Riley hasn’t experienced any harsh feedback, though. ‘We’ve not seen any negative reaction to the move from the investment community,’ he says. ‘But then, we’ve just moved into line with what they’d typically expect from the UK life sector.’
The moral of the story: the investment community dearly loves transparency. So while flouting the trend toward more frequent disclosure might make sound business sense, make sure your investors understand the reasons.
