Does Semi-Annual Reporting Make a Difference to IR?

Short-termism is defined by a focus on immediate results at the expense of long-term interests. For public companies, it is said to foster a culture fixated on managing quarterly earnings to the detriment of long-term value creation.

In recent years, regulators and researchers have jumped on the topic at the behest of public companies, investors, and even U.S. President Donald Trump to explore the issue of short-termism and whether or not a switch to semi-annual reporting would solve the problem.

Although no regulatory decisions have been taken, semi-annual reporting remains under discussion in Canada; someday we may follow the lead of the U.K., Australia and certain European jurisdictions that allow it. In this issue of IR focus, we provide an update on regulatory inquiries into semi-annual reporting and offer insights on how a change in reporting frequency has affected the business of IR in the U.K.

Regulators Weigh In And So Does CIRI

The U.S. Securities and Exchange Commission (SEC) moved to mandate quarterly reporting in 1970, removing a semi-annual requirement imposed in 1955. During the past 50 years, disclosure rules have changed, but not reporting frequency, although regulators have periodically reviewed frequency to ensure it serves the best interests of capital markets participants.

In Canada, one such review occurred in mid-2011 when the Canadian Securities Administrators (CSA) published for comment National Instrument 51-103. It contained a section specifically related to reporting frequency by venture issuers. After receiving objections from various commentators, including some who did not believe quarterly reporting was overly costly or burdensome, the CSA chose not to replace quarterly with semi-annual reporting for venture issuers. This was not the end of the story.

In 2017, the CSA issued Consultation Paper 51-404 to consider ways that regulatory burdens could be reduced. One such burden identified was quarterly reporting. The CSA asked for comment on three questions:

What are the benefits of quarterly reporting?
What are the potential problems/burdens associated with quarterly reporting?
Would semi-annual reporting provide sufficiently frequent disclosure to investors and analysts?

The CSA received 57 comment letters. CIRI threw its support behind semi-annual reporting as an option for all issuers, for a variety of reasons, including that it would “free up more issuer resources, time and capital to deliver sustainable value creation for investors over the long term.” Supporters, including CIRI, also noted that issuers would still be required to disclose material changes in a timely manner.

In the end, nine commenters supported semi-annual reporting, 17 offered qualified support, and 16 objected. Those who objected took the position that quarterly reporting provides investors with timely, consistent disclosure, instills accountability and discipline in management and reduces selective disclosure risk. Some commentators also expressed concern with the idea of Canada adopting semi-annual reporting if the U.S. did not, stating that such a move could hurt the market value of Canadian issuers.

Based on feedback, the CSA initiated six policy projects. A change in reporting frequency was not among them. Once again, this was not the end of the story.

As part of its commitment to modernize capital markets, the Province of Ontario established an independent Capital Markets Modernization Taskforce in February 2020. Streamlining reporting frequency was back in the crosshairs as the Taskforce floated the idea of changing the requirement for quarterly financial statements to allow issuers the option of reporting semiannually. Among the questions posed for comment were:

Should the option of semi-annual reporting be made available to only smaller issuers with less significant quarterly operational changes?
What should the eligibility criteria for those publishing semi-annual reporting be?
If semi-annual reporting is adopted, should issuers using a short-form prospectus be required to supplement their financial disclosure if more than a quarter has passed since their most recent financial statements?

CIRI once again wore its advocacy hat to stand with those supporting semi-annual reporting, this time stating: “Based on a survey conducted with members, CIRI and the majority of survey respondents (74%) agree that reporting semi-annually instead of quarterly should be an option available to all issuers. This would allow management to determine whether semi-annual reporting was appropriate for their business, taking into account their global peers’ reporting frequency. Semi-annual reporting would allow management to focus more resources on the business by eliminating the effort and cost involved in preparing quarterly reports. This also allows issuers to focus increasingly on long-term strategy and performance rather than allocating scarce resources to reporting of short-term results.”

On the topic of cost, large companies are thought to spend more than $100,000 per reporting period on external lawyers, auditors, tax advisors, IR/PR consultants and wire service providers. This does not include soft costs for executive time.

CIRI also cited short-termism as a negative side effect of quarterly reporting and quoted a survey by Focusing Capital on the Long Term (FCLTGlobal), a non-profit organization that develops research and tools that encourage long-term investing and business decision-making. According to the survey, 61% of executives and directors say that they would cut discretionary spending to avoid risking an earnings miss, and 47% would delay starting a new project in such a situation, even if doing so led to a potential sacrifice in value.

It remains to be seen what will come of these latest consultations. The Taskforce’s comment period ended on September 7, 2020 and it has committed to providing recommendations to the Minister of Finance by year end. What we do know is that semi-annual reporting is permitted in the U.K., Australia and certain European jurisdictions and we can look to experiences in those countries to assess impact.

The U.K. Experience

Before 2007, U.K. public companies were required to issue annual and semi-annual earnings reports, along with Trading Statements in between if there were material changes. In 2007, new disclosure and transparency rules forced U.K. companies to issue interim management statements for the first and third quarters of the year. The country’s Financial Conduct Authority then dropped the quarterly requirement in November 2014. Although some U.K. companies still voluntarily provide interim statements, many do not. Three years after the change back to semi-annual reporting, almost 40% of FTSE 100 companies no longer reported quarterly and 60% of FTSE 250 companies shun the practice as well. National Grid, a gas and electric utility with a market cap of 30.25 billion GBP, stopped producing quarterlies in early 2015, a decision that Andrew Bonfield, the company’s Finance Director, said reflected the fact that “requirements to publish information can frequently provide an unnecessary focus on matters of little relevance to a long-term business such as ours.”

So how has investor relations changed for those who switched to semi-annual reporting? According to U.K. IROs we contacted, the change has been significant but not just because of the change in the frequency of reporting. A larger impact has come from MiFID II, implemented in 2018. This requires fund managers to pay for analyst research and brokerage services and has led to less sell-side coverage, particularly for FTSE 250 companies.

“We are under a lot more pressure to take a proactive approach to reach investors than before MiFID II, and whilst I know there was a lot of speculation about semi-annual reporting having a detrimental effect on the level of analyst research, I think MiFID has had the larger impact,” said one IRO.

That said, an end to quarterly reporting has liberated U.K. IROs from devoting time to the task and enabled them to reallocate resources to investor outreach and education. Observed another U.K. IRO: “When we ceased quarterly reporting, it freed up around one month of management time a year which could be focused elsewhere on the business. For our IR program, more time also became available to arrange further educational investor engagement, such as thematic events and capital markets days. Since 2015, we have run annual capital markets days focusing on our regulated businesses and, more recently, our ESG targets and ambitions.”

This same IRO added that her workload has changed “in a positive way” as the ability to “go into greater detail” on particular parts of the business has been well received by investors, but also “requires significant preparation time, both content and logistics.”

A third IRO suggested that without a quarterly report as a “catalyst for contact,” both the investor community and public companies have to look more seriously and actively at ongoing engagement.

Contrary to a belief that semi-annual reporting would reduce or eliminate the practice of providing earnings guidance, many U.K. companies still provide it. Does this promote short-termism? The three U.K. IROs we spoke to said no, and empirical evidence published in 2017 for the CFA Institute using the U.K. as the test site concurred.

Across-the-Pond Advice for Canadian IROs

U.K. IROs whose companies report semiannually offered the following advice to their Canadian counterparts:

Be sure to be as transparent as possible since some investors, wrongly in the IROs' view, conflate the decision not to report quarterly with a general preference for disclosing less information.
Be more proactive in conducting investor roadshows and looking for opportunities to meet with and educate investors, recognizing that without this extra effort, it is easy to find your company ignored between semi-annual reporting periods.
Seek to elevate conversations with investors to help them gain a more nuanced understanding of the company’s business model and strategies.
Focus investors on long-term strategies and, when you do report, ensure the KPIs chosen relate to progress against those strategies.
If you plan to issue guidance, strive to go long term and use ranges so as not to fall ‘into the trap of short-termism’ that semi-annual reporting was intended to alleviate.
Closely follow peer companies that report quarterly, as what they report will be a catalyst for investor engagement.
Prepare for analysts and investors to react (and perhaps overreact) to the earnings trends of quarterly reporting peers, as well as alternative news sources.

The Bottom Line

The experiences and advice of U.K. IROs would suggest that a change in reporting frequency does not alter the need to follow what Canadian IROs already consider best practices, such as focusing on transparency, taking a proactive stance on investor outreach and educating investors/analysts on business models/long-term strategies. It does create additional time to work on these best practice approaches. This seems like an excellent outcome.

Where To Get More Information