After Google, Time To Cut Out Earnings Season?

15 january 2013

Increasingly we live in world where data dispersion is just a “CLICK” away. Sharing images with someone far away can happen in an instant. However, such an ability can become a nightmare if a button is pressed at an inappropriate moment or without full authority.

 

• Never more was such a scenario played out in reality than on Thursday, October 18th 2012.

Google Inc., (NASDAQ: GOOG) endured the single largest price plunge in stock market history on the 18th. Results were accidentally released and the error was more than just an unauthorised transmission as it revealed profit was off by 20%.

• USD24Bn was wiped off the company’s value.
• 12:30 USD754.60 ~ 12:52 USD 687.30 -9%  (All Times Eastern)

Over recent years many voices have blamed much of the free markets demise on the pressure Chairmen and Chief Executive Officers (CEO) face when the companies they serve as stewards for have to (a) release their quarterly results and (b) provide guidance for the next quarter and year ahead. It can be destabilising for as soon as the C-Suite sign off on and release into the public domain an earnings target, meeting that target typically becomes way more important than anything else.

Blame Harvard MBA’s:

Many will point to the fact that the modern day obsession with the system of “Quarterly Statements” has stemmed from the teaching within the Harvard Business School (HBS). C-Suite level officers who missed guidance will according the HBS feel pressures in their remuneration ranging from lower bonuses to outright dismissal. MarketMind would never argue that target setting and goal attainment is a bad thing but we live in a world where the pressure is almost entirely on the bottom line and the business decision is shaped by short-termism, i.e.

• Question… “Make the Numbers” or “Build the Business”.
•  The penalty for missing the numbers may be termination.
• The cost of making a short-term target is that long-term business generally suffers.

Odd then to suddenly see HBS suggesting that whilst the capitalist, free enterprise model is the best way to drive the global economy to a lasting recovery, because lasting wealth…real wealth and real jobs comes from the private sector not the state at the centre; it questions the time horizon in play.

“The Magazine March 2012”    “Capitalism for the Long Term”    Dominic Barton

http://hbr.org/2011/03/capitalism-for-the-long-term/ar/1

In this work, Barton suggests that:

“…there is growing concern that if the fundamental issues revealed in the crisis remain unaddressed and the system fails again, the social contract between the capitalist system and the citizenry may truly rupture, with unpredictable but severely damaging results. … Most important, the dialogue has clarified for me the nature of the deep reform that I believe business must lead—nothing less than a shift from what I call quarterly capitalism to what might be referred to as long-term capitalism. (For a rough definition of “long term,” think of the time required to invest in and build a profitable new business, which McKinsey research suggests is at least 5 to 7 years.) …”

In the United Kingdom, the Leader of the Opposition, Ed Miliband (Labour) has recently pledged that he wishes to end the practice of public companies publishing their accounts every quarter.

On Tuesday, October 2nd 2012 he told his party conference:

“…Businesses tell me that the pressure for the fast buck from City investors means they just can’t take the long view. …They want to plan 1 year, 2 years, 10 years ahead but they have to publish their accounts in Britain every 3 months. In line with the wishes of the best of British business, we will end that rule so companies in Britain can take the long term productive view for our country. …”

Mr Miliband has good intensions, but he ignores the fact that all fee market corporations with a stock exchange listing are required to make a quarterly statement…it is not just a UK rule. Trying to go it alone to a longer time period will actually be a huge disservice to UK Plc.