Every time reporting season rolls around, in Australia and around the world, the discussion of whether organisations should disclose their financial results on a quarterly or half-yearly basis is reignited.
The goal of this article is not to question the legal reporting requirements for listed companies in Australia – in simple terms, the ASX requires listed companies in Australia to produce financial reporting on a half-yearly and annual basis, with some exceptions – but rather to discuss the real impact of reporting, which does not hinge solely on frequency.
The topic of organisational culture is one that is close to my heart, and frequency of reporting plays into this.
Thriving in turbulence
At top level, quarterly reporting helps organisations achieve their goals to disclose and facilitate analysis by the market. The regularity and frequency of reports signal accountability and transparency, and illustrate any emerging changes and trends so that timely and appropriate action may be taken by the company and investors alike. The theory is that this, in turn, builds trust.
Early in my career I worked in the revenue forecasting department of a well-known Australian company. Not only did we regularly report on key metrics, we used the genius of spreadsheet models to produce business intelligence for the company’s executive on a weekly, if not daily, basis.
To this day, the company has continued to thrive across changing economic cycles and turbulent market conditions. This can be attributed to strong governance and the closeness between the executive and management, which ensure data and process integrity.
The company’s high standards in the area of governance are among the best that I have seen in my career. But the greatest value of this internal reporting was in the target audience’s prompt interpretation of the findings. In this case, the executive was able to quickly identify and confront issues and take appropriate action within the context of the commercial reality and business intelligence they were privy to.
Companies may churn out reports on a quarterly basis, but the value of such output to non-professionals (such as some shareholders) would be questionable in the absence of further advisory services they might have to seek, or some form of algorithmic tool. The fact that there is a growing market for services and products to help amateur investment enthusiasts understand such reports and analysis shows just how useless information is without context.
This “interpretation asymmetry” between each segment of the public audience also creates, in my opinion, the opportunity and risk of manipulation by prominent interest groups or activist investors with an agenda to influence the masses. By nature, many of us, particularly in the face of ambiguity, simply enjoy believing what we have been told is true.
Higher frequency is not always a moonshot
While there are positives to frequent reporting, there would also be significant negatives if the required frequency of external reporting were to be increased, bearing in mind that at present most listed companies in Australia are only required to report their financial results biannually.
One of the biggest downsides is the burden it would place on a team of executives in terms of cost, resourcing, compliance pressures, administration and any subsequent questioning by analysts and the media. This would exacerbate some existing problems, in my view. One obvious consequence is the divergence of focus and the resultant risk and opportunity costs.
It could be argued that, potentially, the increased scrutiny provides an opportunity for business leaders to demonstrate their experience and talent to deliver on ever-escalating market expectations and intense competition, while avoiding short-termist myopia in favour of long-term strategy. But in truth, it is not realistic to be able to “10x” and achieve “Moonshots” in every undertaking.
A spiral of misinformation
The irony is that the ardent pursuit of more frequent reporting and disclosure all too often leads to compromises on other critical matters, which may go undetected and unreported. For all the focus on reporting to the market, the quality of reporting produced for executives within their own organisations is often of dubious quality.
I have seen departments take advantage of an executive’s remoteness from the truth of how things really are.
For example, seemingly harmless projects and minor investment decisions are often simply delegated down the management ranks in place of an appropriate level of executive sponsorship. Expenditure is made on systems and computer applications that are not aligned with culture, nor address the limitations of an organisation’s capabilities.
This commonly results in poor system uptake, yet data on internal usage rates is readily manipulated to incorporate what, in truth, was scope which did not justify the original investment and ongoing system maintenance cost in the first place. Such poor practices exist and continue to compound.
I presume that those executives who have fallen victim to such deception do not have the time nor the bandwidth to listen, to ask the right questions, to astutely challenge the information they are presented and know who to trust. And thus, a downward spiral of error and misinformation is perpetuated.
Not only is this a tragic waste of precious time and money, but for the teams of people working on something built on distorted versions of the truth, they face the daily demoralisation of operating in a toxic and debilitating culture of lies, blame and pretense, while their senior leaders hold on to delusional beliefs that everything is fine.
In such environments, those who endeavor to succeed learn to shield their executives from the truth and to only tell them what they want to hear. The vicious cycle continues, organisational culture suffers and issues which should have been identified in reports become increasingly ill-defined.
People leave, but perhaps this is acceptable in many organisations as there will always be more people than jobs available on the market. If the quality of personnel does not really matter, replacements should be relatively easy to find.
As for shareholders and investors, well, there will always be some financial report designed to target the foolish, ignorant or unwary.
Enriching the bigger picture
Whether it is quarterly or half-yearly, all reporting needs to be timely and of genuine quality in order to deliver value. Executives must stay truly close to their businesses and not dismiss any department, internal report or decision as being of lesser importance or relevance to the core business. If any such functions or practices exist, it is time to challenge why they are required at all.
It takes energy and mental acuity to ensure there is symmetry between the quality of reports that are produced for internal use and the standard of reports that are for external scrutiny.
Everything worth reporting can only serve to enrich the bigger picture. Superior quality governance and culture are not just about regularly churning out reports.
Maria Fok has corporate experience from ASX-listed, government and global organisations and a passion for speaking and writing about how businesses may accelerate their progress, improve and innovate.