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British reporting rule change exposes transatlantic cultural gap

A man walks past the London Stock Exchange in the City of London October 11, 2013. REUTERS/Stefan Wermuth
A man walks past the London Stock Exchange in the City of London October 11, 2013. REUTERS/Stefan Wermuth

By Jemima Kelly

LONDON (Reuters) - As investors prepare to digest the latest round of company earnings figures, Britain's move to scrap the quarterly reporting requirement has revealed a divergence of opinion between the domestic and U.S. investment communities.

While British investors endorse what they perceive as a measure against short-termism, their counterparts across the Atlantic are concerned that less frequent company reports will mean less transparency.

In a world of increasing financial regulation, Britain is bucking the trend by accelerating EU plans to relax the current reporting rules, which are especially onerous for small firms.

"A desire to not disappoint the markets, when you are speaking to the markets every three months, will inevitably lead to the business making short-term decisions to the detriment of long-term shareholders," said Kevin Murphy, a fund manager at Schroders, one of Britain's biggest asset management companies.

All eight British fund managers interviewed by Reuters for this article supported the rule change.

Some corporate heavyweights have already made moves away from the treadmill of quarterly reporting.

Germany's Porsche was involved in a high-profile dispute between 2001 and 2008 with Deutsche Boerse, operator of the Frankfurt Stock Exchange, after refusing to comply with the requirement to issue quarterly reports.

Paul Polman, CEO since 2009 of Anglo-Dutch consumer goods giant Unilever , the seventh biggest firm on the London Stock Exchange, is a critic of what he calls "quarterly capitalism". He has changed Unilever's reporting so that full bottom-line figures are given just twice per year.

RELAXED RULES

Under the newly relaxed rules companies could of course choose to continue issuing quarterly statements, but early signs suggest that many would stop.

In a December poll of Britain's 350 biggest companies by the ICSA, a trade body, and the Financial Times, 20 percent of respondents said they would scrap the practice, while 23 percent said they would continue and 53 percent were undecided.

The idea of scrapping quarterly reporting was put forward by economist John Kay in a 2012 review, which pressed for less short-termism in equity markets and was widely endorsed in Britain, both by parliamentarians and investors.

But Kay said that U.S. investors, who form the largest group of foreign shareholders in British companies, were less enthusiastic, worrying that this kind of deregulation could make companies more opaque.

Though many in the United States agreed with Kay about the damage caused by the quarterly earnings cycle, "the suggestion that the requirement might actually go is something that even many people who take that view look at with horror," he said.

That horror just might deter companies with a strong U.S. presence from changing their practices.

And for the 26 British-listed companies with secondary U.S. listings, which represent more than 2 trillion pounds ($3.29 trillion) on the London Stock Exchange, there may be extra pressure to meet quarterly reporting expectations, though they are not required to do so under U.S. law.

"The notion that information disclosure is the answer to most problems is even more heavily ingrained, I think, in the U.S. than it is here," Kay said.

TRANSPARENCY

In the United States, companies have had to issue quarterly reports for decades, whereas the requirement was only formally introduced in Britain in 2007 as part of the EU's Transparency Directive.

It is that directive which is currently being amended, as announced by the European Commission in June.

Early this year the British government will bring in legislation to allow it to axe the quarterly reporting requirement ahead of the EU's November 2015 deadline.

The European Commission said it wanted to encourage long-term investment but also to lessen the administrative burden for small- and medium-sized companies, for which the cost of regulatory compliance eats up a bigger slice of outgoings.

The rule change might also encourage private companies to list shares for the first time.

" is part of the regulatory burden associated with listing which means that some companies that might otherwise consider equity finance might not do so," said Leo Ringer of the Confederation of British Industry.

But it seems likely that firms with a large proportion of U.S. investors will be wary of doing away with the practice.

Sammy Simnegar of U.S. asset manager Fidelity, 18 percent of whose billion-dollar International Capital Appreciation Fund is invested in British companies, said that the relaxation in reporting rules would impair the transparency that Britain is renowned for and would be a "move in the wrong direction" for companies.

"You don't want to be doing something that puts you one step behind," he said. "You want to be best in class." ($1 = 0.6084 British pounds)

(Reporting By Jemima Kelly; Editing by Giles Elgood)

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