adminAlbert Nomuredzo In the money
Investor expectations, recommendations and conclusions have not always tallied with corporate strategy resulting in equity prices being derived largely from reported earnings and earnings trends. As such, managements have often prioritised the satisfaction of investor expectations at the expense of adopting the best fitting corporate strategy befitting the operating environment.
This has often led to manipulation of financial statements to achieve expected earnings targets or irrational and inappropriate courses of action.
For instance, some managers have adopted dividend policies that are antagonistic to the going concern’s objectives of the business to appease the market at the expense of the business. The Zimbabwe Stock Exchange is, however, seeking to have companies issue quarterly reports.
In the absence of other relevant statistics relating to growth, policy and industry performance, this not only adds to financial costs related with reporting but also prompts the desire to tweak reported earnings in line with market expectations.
In an environment where cost containment is the fulcrum of survival strategies given shrinking revenues, this additional demand on listed companies seems to defy logic.
In their defence the listing authorities argue that the introduction of quarterly reports is meant to make effective investment decisions and prudently deploy financial resources in capital markets to their most effective use.
Despite this being in line with international standards, particularly in the developed economies where companies release quarterly earnings reports, they are released parallel to other market information like consumer spending reports, job reports and sector growth updates which form the body of knowledge from which investors can sift through to determine equity pricing.
This is not the situation with local markets. Unlike in the developed markets, relevant information or developments in industry and the general economy are kept secret and released infrequently, save for some basic information on inflation trends and a few other statistics.
This issue explores some of the possible reasons that might merit mandatory quarterly reporting from both a company and shareholder perspective.
One supporting argument is that quarterly reporting will make it easy to identify all areas of potential concern quickly while there is still time as opposed to investors having to wait for half-year or full-year reports to learn about them by which time it might be too late to take corrective measures to address the potential challenges and ensure that appropriate shareholder response is adopted.
Infrequent reporting has often caused price shocks when companies issue cautionary statements warning shareholders of potential losses that often take the market by surprise with earnings warnings statements arising from unperceived potential or problems.
Frequent analyst reports, commentaries and briefings provide a reminder to management that shareholders, among other stakeholders, are watching.
This will also help enhance corporate governance and reduce the Agency problem in most listed entities as well as allow shareholders to frequently track the performance of their investments. To the reporting company, setting and conforming to a specific reporting schedule is a tell-tale sign of a well-managed firm with clearly defined corporate strategy communicated to and understood by the Investing stakeholders.
Companies that regularly publish their ups and downs often win the hearts of investors as the consistency casts a positive light on management’s ability and corporate governance policies.
However, in the absence of other sufficient related information, earnings alone are likely to provide a biased estimate of equity prices and investment course counsels.
Leading to the release of earnings reports there is usually a rush to meet communicated or desired targets, the working cycle is disrupted to make time for internal auditors and financial accountants to accumulate and verify information.
No matter how insignificant the time and resources might be deemed to be; in line with the currently prevailing environment in which businesses should be working on long-term strategic corporate objectives, mandatory quarterly reporting will be antagonist to long-term growth and survival efforts. It is rather unfortunate that economic information is updated and released into the public domain in a lagged manner that significantly reduces its usefulness, economic growth and sector specific growth estimates and developments are released annually.
These fundamentals are not frequently reviewed and publicised in line with changing economic conditions, for example the World Bank continuously reviews growth estimates and has recently revised Zimbabwe’s growth estimates to 2 percent from the 6,2 percent target issued by the Ministry of Finance but the local economic barometers have not replied with supporting statistics and facts regarding the current growth patterns in response to the revised estimates.
In isolation, quarterly reporting will not aid in the Investment decision-making process and as such is not necessary.
Mandatory quarterly reporting will end up defeating its intended purpose by feeding the Investing public with compromised information doctored to influence investing decisions towards manipulated ends.
What would however, seem feasible under the current circumstances is an update of key fundamental variables like turnover, operating costs, earnings and any significant developments that are deemed to have bearing on a company’s earnings generation capacity.
A simple update on key operational aspects of the business that does not require taxing demands in terms of both monetary and human resources seems justified under the current business environment.
Financial statements that are not accompanied by other sector specific and economic information will not achieve much in aiding in the Investment decision-making.
It’s all or nothing when it comes to quarterly reporting, otherwise in isolation (without the support of other pertinent market statistics) it’s an unnecessary utilisation of time and financial resources that risks misleading the market in a time when survival is hinged on efficient resource deployment and long-term strategy alignment.
Albert Norumedzo is a markets analyst who writes in his own personal capacity. He can be contacted on [email protected]
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