This is Why You Live Life Quarter to Quarter.
“Next quarter’s results are the most important in our history.” Ever heard that before? You almost certainly have because that line gets uttered every quarter in meetings around the world.
In most of today’s established organizations you are bound to find a 90 day cycle of madness, all centered around financial performance and incentives. This three months habit has become so engrained in our working life that we’ve become adept to making it a part of our day-to-day work. We now fulfill metrics, set targets or KPIs and keep track of all the hoopla and industry speculation in the press. But in the bigger schemes of things, quarterly reporting hasn’t always been the panacea of our performance on the job. Actually, its origins are more part of our longing for order in an often messy and unpredictable reality.
Why do we use Quarterly reporting in the first place?
Let’s start with what we have right now. The typical financial year is divided into four quarters. But how did we come up with that? As sentient human beings, we’ve long searched to codify the change of seasons or the passage of time with our habits and manufactured customs. The answer, it turns out, is less existential and quite modern.
For the better part of the past 80 years, reporting windows have shrunk. Starting in 1934, amid a wave of Depression-era regulations, the Securities and Exchange Commission forced U.S. companies to file annual reports and disclose information to investors. In 1955, the mandate became semiannual and in 1970, quarterly. It was in the 1980’s where much of Wall Street’s current culture was born that investors began to put a spotlight on quarterly reports.
But even at that time, research on companies that voluntary adopted quarterly reporting didn’t support the claim that a regulation forcing firms to report more frequently improves earnings timeliness. By examining 28,824 reporting frequency observations from 1950 to 1973, authors Marty Butler, Arthur Kraft and Ira Weiss have found little evidence of differences in timeliness between firms reporting quarterly and those reporting semiannually.
In fact, rigid quarterly reporting requirements can promote an excessively short-term focus by companies, investors and market intermediaries. They impose unnecessary regulatory burdens on companies and detract managers from focusing beyond those reporting windows. Even incumbent Democratic candidate, Hilary Clinton weighed in on the debate recently by saying:
“Quarterly [reporting] as developed over recent decades is neither legally required nor economically sound. It’s bad for business, bad for wages, and bad for our economy.”
In that respect quarterly reports don’t tell you what you need to know most at that point in time. If your team’s growth rate is up or down by X per cent over 12 weeks, you’re still not getting the full picture. Instead, today we’re rather seeing organizations craft reporting timelines to suit their business cycles. Buffer, the social networks management software, has tried revenue, salary and equity transparency since 2013. As an investor, you can browse up to the minute economic data wihtout having to wait for the release of financial statements. In the UK, a $700 billion management fund, Legal & Counsel and insurance group, Admiral, have stopped releasing interim statements since mid-2015 citing that it “adds little value for companies that are opreating in long-term business cycles.”
“While each company is unique, we understand that providing the market with quarterly updates adds little value for companies that are operating in long-term business cycles.”
Although valuable companies still releases relevant information in these statements (otherwise this process would have been phased out by now). That is only because they operate under the guarantee of the reporting process, the legal environment, the accounting standards and SEC rules, the fact that statements are audited or reviewed — it all makes for a unique kind of information that investors can’t get any other way.
But in a highly competitive global market environment, responsive organizations don’t have to succumb to this. The large organizations of the future will increasingly explore bespoke reporting windows for their own bottom line. In the next accounting renaissance, gone are the days of Q-filings and press releases and in come the bot-auditors. Basic auditing and accounting tasks are bound to be automated.
Different contexts call for Different reporting windows.
Without falling into the same reporting traps of yesteryear, it’s time we ask a the question: If not quarterly reporting, then what?
The length of reporting cycles is barely important in today’s creative economy. Instead, the focus is on adaptability. Rather than debating the length of the reporting period (quarterly, semiannual or yearly), we should be exploring the most adaptive reporting format. Your organization, like any complex system needs to constantly adapt and iterate to navigate the current work climate. Figure out the tools that work and leverage this complexity for future opportunities and consider these three paths:
As an entrepreneur, experiment with weekly reporting sprints like Holacracy’s Tactical Meetings. Explore key activity patterns within your sector. Ask yourself what kind of market cycle, product turnaround and stage your business is at.
As a line employee, make the case for more adaptive accountability. Spotify for instance uses Agile Squads to launch any new product. Question if your organization is creating a tomorrow different from yesterday. Draw a limit on how far you’d push the past into the future before businesses with fewer resources begin to catch on.
As a senior manager, keep the vision focused and demands less restrictive. What reporting windows could your organization try without jeopardizing the quality and scope of information available to its investors? Amazon has famously tamed Wall Street to accept non-existent margins in favor of long term growth, whereas McDonald’s recently stopped publishing same-store sales data every 30 days.
Be intentional about your reporting cadence. Test different balances for your organization and team. Use reporting carefully to explain why your organization exists. Almost all worthwhile ideas take longer than 90 days to come to fruition.
Want more? Sign up to get our newsletter This Week @ The Ready delivered to your inbox every Saturday. Receive links to our latest articles and perspectives on org design, technology, and the future of work.