How chasing quarterly financials leads to wrong decisions

We all know that quarterly financials are a way of life in business. Most businesses try to play the game right- manage results for maximum quarterly profit, lower expectations for the market, provide advance warning if bad news is coming and then try to beat expectations. Where is this culture leading us? Well for one thing, the whole practice is geared towards managing the stock price. The stated objective and purpose of regulation is to provide timely information to stakeholders so that they can assess the financial health of companies which in turn helps them decide whether to hold the stock or not. There are all kinds of tools available to investors including analyst reports however quarterly earnings release have become “the most important”  tool for investors.

Think about it- one quarter is just three months. What can the organization do in three months? I have seen this for too long in my professional life- “we hope the next quarter will be better”, “we must make our numbers next quarter”, etc. Often there is no realistic plan to get there, just wishful thinking. Well part of the problem you can’t just plan for three months or for that matter for one year unless it is part of a bigger, long-term plan. Long term planning is always difficult and successful execution requires that the management sticks to the plan regardless of quarterly results.

Well, the question is- are investors better off with just timely and accurate reporting of results? If businesses are not adding value to their businesses, not investing for the long-term and making bad choices to influence the quarterly results, is the end result good for investors? There are countless studies done on this subject and the answer is overwhelmingly “no”. You can’t have a good stock price if there is no underlying strategy for the long-term which the management believes in and executes against.

This opens up a bigger question- who are the stakeholders in a business and how can a business benefit them most? The owners are of course #1  in the form of stock ownership or private equity. Then you have employees, government and the society. I would argue that the focus on quarterly financial reporting (for public companies) does not help the interests of the stakeholders. I do not propose any alternatives at this time, nor do I suggest that private ownership is better than public;  just want to open up the discussion.

Please post your comments for and against.