Unlike its peers in corporate India, Infosys continues to make public forecasts of its quarterly earnings. The vast majority shy away from such announcements though some throw a few hints, when pressed. This is quite unlike the situation in the United States, where more than half of the companies listed provide their own forecasts of quarterly results. Of late, however, there has been concern in the US that quarterly guidance "is at best a waste of resources and more likely a self-fulfilling exercise that attracts short term traders". A high-profile coalition of business people led by William Donaldson, former Securities & Exchange Commission chairman, has warned that excessive focus on short-term results damages the country's economy and plays into the hands of hedge funds and private equity groups. Above all, it has highlighted growing concerns over America's attention to short-term goals.
The group is probably right. A study by McKinsey of 4,000 companies, with revenues of over $500 million, found that companies that provided guidance did not really see superior valuations and neither did it reduce the volatility in their share prices. The only significant effect was that trading volumes increased. While that might certainly interest short-term punters who trade on the news of such announcements, it should be of little concern to most managers, except those in companies with little floating stock. The study also found that providing guidance can be expensive; apart from the senior management time needed to prepare reports, firms tended to focus excessively on short-term results. So, if companies hoped that by trying to predict numbers they would see lower share price volatility and better valuations, that hasn't happened.
It's just as well then that companies in India don't get into the predicting game. But they can't grumble about putting out quarterly results. CFOs claim that quarterly numbers don't always tell the true story "" complying with accounting standards could distort the picture especially for foreign exchange positions, temporary cash surpluses or estimates of future liabilities, they say. Also, though accounts for the quarter don't need to be audited, most companies feel obliged to subject the results to the scrutiny of auditors. And because auditors take a look at the results, there could be some adverse remarks. The other point they make is that the recognition of earnings depends on the accounting policy that a company chooses to follow "" depending on whether the company is conservative or aggressive, the numbers can be depressed or exaggerated. They're partly right; there is room for managements, especially of smaller firms, to tweak numbers and attribute them to complicated accounting practices that the lay investor would not understand. That can come in handy if the company plans to raise funds in the near future, because smaller companies are not tracked that closely.
But then companies that want to fudge figures can do so even with half-yearly or annual numbers. The same CFOs also concede that the quarterly ritual does bring about a certain discipline. With interest rates swinging the other way in a matter of months, the rupee appreciating rapidly and oil prices touching new highs, shareholders want to know whether managements are alert. More than the numbers themselves, it's important to be able to get a feel of whether the management has an action plan to tackle the problems on hand. The several instances of companies that must take marked-to-market hits on exotic forex derivatives are a case in point. Even if the losses today are notional, shareholders would like to know what the company is doing to ensure that they don't become real losses. Moreover, disclosures in future quarters will help shareholders monitor whether the losses are becoming bigger or are manageable.
As it is, shareholders don't have access to adequate information on smaller companies so it becomes all the more important that they disclose numbers more frequently. In fact, a leading bank stayed quiet about its exposure overseas until questioned by an analyst: the stock crashed some 9 per cent post the disclosure. No competent management should worry about its stock prices; they need to have the courage to present the numbers as they are, without losing sight of their long-term goals. In the long run, that's what will win them loyal shareholders.