Why Unilever Stopped Issuing Quarterly Reports
Contrary to popular belief, providing more information to “stakeholders” can be a very bad idea.
PHOTO CREDIT: Getty Images
A persistent myth of the information age is that more information drives better decisions. I call it a myth because there are many situations, in life and in business, where it's best that everybody--including the stakeholders--when stakeholders are kept out of the loop.
Before explaining how this works in business, here's an example from my personal life. A few years ago, I decided to drive up the winding road that goes up to the peak of Mount Washington, which is the highest point in the eastern United States.
This was not a great idea because I have mild acrophobia and that road had no guardrails and straight down cliffs. I was absolutely terrified, but I knew that if I communicated those emotions to my wife, she'd freak out and we'd feed off each other's fear and I'd probably drive off the cliff.
In other words, I was in a situation where it was in the stakeholder's interest (i.e. my wife's interest) for me to withhold some information.
A similar situation exists in business when it comes to financial reporting, according to a study to be published this month in The Accounting Review, the journal of the American Accounting Association. The study
"compares the before-and-after performance of American firms when the U.S. government changed the frequency of required financial reports, found that shorter reporting intervals "engender managerial myopia which finds expression in a statistically and economically significant decline in investments along with a subsequent decline in operating efficiency and sales growth."
In other words, the more information you share with your investors, the worse your decision-making is likely to be.
In the study, companies that reported annually, when compared to those that report quarterly, had an average of 10% greater annual sales as a percentage of assets, an annual sales growth almost 3.5% greater, and 1.5 greater return on assets.
The reason is simple. Frequent financial reporting forces executives to think short-term rather than long-term, causing them to put off long-term investment in order to please short-term investors. According to the study
"when new regulatory mandates forced companies to increase the frequency of their financial reporting, they reduced their annual capital investments by about 1.5% or 1.9% of their total assets, depending on how capital investments are defined. Considering that the average annual capital investments of these firms amounted to about 9% of assets, those were hefty cuts."
By contrast, when investors are kept a bit more in the dark, executives are more likely to make wise decisions that will improve the long-term health and viability of the company.
That's definitely not happening in the US, where publicly-held companies in the US are required by law to report quarterly. In fact, investors in the US are now pressuring companies to implement Real Time Financial Reporting (RTFR), which would turn quarterly reporting into daily or even minute-by-minute financial reporting.
The premise of RTFR is that more information will drive better decisions or as one vendor put it, "having access to this insightful data will help to reduce the amount of time it takes to make decisions and aid in streamlining the decision-making process."
This is, of course, utter nonsense. RTFR is a recipe for micromanagement by investors who only think they know what they're doing.
What's needed for better decision-making inside publicly-held companies isn't better-informed investors, but more autonomy for executives so that they can balance long-term and short-term objectives.
That's why some companies, such British/Dutch multinational Unilever, are moving away from quarterly reporting (which the EU does not require.) As Unilever CEO Paul Polman recently put it:
"We needed to remove the temptation to work only toward the next set of numbers...Better decisions are being made. We don't have discussions about whether to postpone the launch of a brand by a month or two or not to invest capital, even if investing is the right thing to do, because of quarterly commitments. We have moved to a more mature dialogue with our investor base."
Too bad the tech-addled US investor community is hurtling in the opposite direction, eh?