Curse of quarterly report haunts markets

Curse of quarterly report haunts markets
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First Published: Fri, Feb 27 2009. 08 54 PM IST

Updated: Fri, Feb 27 2009. 08 54 PM IST
The Americanization of Japan has been an objective of the US treasury for decades.
The push accelerated under then president Bill Clinton’s tenure during the 1990s. Two of Clinton’s treasury chiefs, Robert Rubin and Lawrence Summers, rarely missed an opportunity to urge Japan to be more Western— more shareholder-friendly, more transparent, more flexible.
There are signs US officials are getting what they wanted, and it’s not necessarily a good thing.
Japanese are still shuddering at recent news that NEC Corp. is cutting 20,000 jobs, Nissan Motor Co. Ltd is axing 20,000 and Panasonic Corp. is firing 15,000. Layoffs at Bridgestone Corp., Pioneer Corp. and Toyota Motor Corp. also show how far Japan is moving away from lifetime employment.
All this firing differs from Sony Corp.’s move to cut 16,000 jobs in December. For Sony, it was a long overdue admission of overreach, bloat and how much the iPod set the company back. Recent layoffs seem more American in nature with panicked attempts to halt declines in stock prices.
It’s no fun being a public company today—not with economies falling and credit markets seized up. Shareholders are demanding action from top executives, and so they are turning to staff cuts. The motivation for such moves seems clear enough: the next quarterly-earnings report.
It may be time to do away with this most cherished pillar of American-style capitalism.
Whacky models
Among the common threads between blowups at Enron Corp. and Lehman Brothers Holdings Inc. are extreme short-term thinking and whacky compensation models. The US system that lay in tatters encouraged creative accounting, such as overstating the value of assets, underplaying risks and hiding what you can’t explain off-balance sheet.
If executives didn’t need to impress investors every few months, they might be less inclined to take extreme risks or cook the books. Far from resulting in less transparency, a world without quarterly dramas might encourage steadier earnings and less financial hubris.
Anyone rolling their eyes at this train of thought may want to read The Smartest Guys in the Room, the 2003 book by Bethany McLean and Peter Elkind about Enron’s demise. Its account of the hows and whys of deep-frying corporate books is as valuable as ever while Wall Street burns.
Skewed thinking
Even executives who aren’t engaging in fraud can let the pressures of quarterly reporting skew their thinking.
Japan began requiring all listed companies to report quarterly in 2003. Now, executives may be taking self-defeating steps they will regret five years from now. NEC, Nissan, Panasonic and others are helping spook consumers into a multiyear hibernation. Far from spending more, the nation’s 127 million people will be saving more aggressively.
Household frugality was one reason the recovery that ended recently was so modest. After the recessions and deflation of the 1990s and early 2000s, consumers kept their wallets closed.
Companies didn’t want to share profits with workers. Expect new levels of thriftiness now that Japan’s biggest names are firing workers, just like their US peers. Far from expecting lifetime employment, a fast increasing number of workers from Tokyo to Fukuoka would be happy with part-time jobs. Shedding tens of thousands of workers to score points with shareholders may cause long-term pain.
Many sides
There are many sides to this argument. In some ways, Japanese companies are paying a price for not doing more to reduce excess and move jobs overseas to cheaper locales during the fat years. Japan hasn’t encouraged entrepreneurs to do their thing and create new jobs.
The most remarkable thing about Japan’s recession is how surprised Japan’s leaders are by it. The 46% plunge in exports in January produced a record trade deficit in a nation that has long prided itself on surpluses. Didn’t Japanese officials know the economy was completely reliant on US demand?
Great things would come from companies adhering more to global standards and welcoming foreign investment. More international diversity in corporate board rooms and among large shareholders could shake up Japan Inc. for the better. In a perfect world, reporting every few months forces accountability.
Yet it also puts a disproportionate amount of focus on a 90-day period at the expense of the bigger picture.
Scoreboard distraction
Hong Kong, for example, wants to implement quarterly reports from the current half-yearly system. One wonders if it’s beneficial to have executives in Asia’s ninth largest economy constantly distracted by the scoreboard.
Half-yearly reporting—or even yearly—may create a more stable environment. As long as executives augment the void with credible updates here and there on profitability and risks, there would be less direct focus on share prices.
Investors might reward companies that voluntarily offer true insights into their health over ones that don’t. If the reality every 6-12 months doesn’t match the spin, the shares would be punished. Talk about letting the free markets work.
Asia needs to become more open to the financial world around it. Recent layoff announcements make you wonder if Japan is learning the wrong lessons from the West.
Bloomberg
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First Published: Fri, Feb 27 2009. 08 54 PM IST