Disclosure reform an idea worth pursuing

Concerns about data bombardment apply not only to the length of these disclosure documents, but how frequently they are published. As the quarterly reporting rush is increasingly engineered to appease fickle investors, day traders, and hedge funds, there is the risk of short-term thinking that displaces long-range strategies that are even more beneficial to long-term investors, including the majority of Americans whose only exposure to the stock market is within the relatively safe confines of 401(k) plans.

Over the years, under the leadership of various chairmen, the Securities and Exchange Commission has flirted with ways to rethink its disclosure regime with the goal of improving effectiveness and transparency, all while reducing cost, complexity, and redundancy.

Aside from some around-the-edges tinkering, these ambitious plans typically go nowhere fast. The current Commission, for example, is amid a disclosure review that was initiated by former Chair Mary Jo White. Among current commissioners, only Kara Stein was involved in that process when it began in 2013.

One of the biggest, most controversial changes under consideration, however—a move away from mandatory quarterly reporting—is gaining momentum. The catalyst was an August tweet from President Trump.

He wrote: “In speaking with some of the world’s top business leaders I asked what it is that would make business (jobs) even better in the U.S. ‘Stop quarterly reporting & go to a six-month system,’ said one. That would allow greater flexibility & save money. I have asked the SEC to study!”

That couple dozen words may have done more to fast-track disclosure reforms than all the voluminous reports, think tank papers, and academic research that preceded it.

The debate over the necessity and value of quarterly reporting is hardly a new one. Trump would probably be dismayed to learn that Hillary Clinton promoted the idea of less frequent reporting on the 2016 campaign trail.

The debate over the necessity and value of quarterly reporting is hardly a new one. Trump would probably be dismayed to learn that Hillary Clinton promoted the idea of less frequent reporting on the 2016 campaign trail.

In a stump speech, Clinton cited a survey of corporate executives that found more than half would hold off making a successful long-term investment if it meant missing a target in the next quarterly earnings report.

As an antidote to “quarterly capitalism,” she suggested that, “American business needs to break free from the tyranny” of quarterly reporting.

Others who have also supported a shift away from quarterly reporting—or at least are carefully considering the benefits and consequences of doing so—include Berkshire Hathaway CEO Warren Buffett, JPMorgan Chase CEO Jamie Dimon, the Business Roundtable, and Larry Fink, co-founder and CEO of BlackRock.

Sparked by Trump’s “suggestion” to consider reducing corporate reporting frequency, the SEC in December launched a public comment period on the matter.

Through March 21, the Commission will solicit and review public commentary on “the nature and timing of the disclosures that reporting companies are required to provide in their quarterly reports filed on Form 10-Q,” including when the disclosure requirements “overlap with disclosures these companies voluntarily provide to the public in the form of an earnings release furnished on Form 8-K.”

The call for comments notes that earnings releases and calls are actually among the most material announcements that reporting companies make. Stock price, it says, is usually not affected by the filing of a Form 10-K or Form 10-Q following a corresponding earnings release, because all material information has already been disclosed in that outreach.

The SEC’s effort asks intriguing questions, and the responses should offer a view into the minds of both executives and their shareholders.

Should the Commission move to a semi-annual reporting model for all reporting companies? Should different types of companies (non-accelerated filers, emerging growth companies) be held to different timetables?

Do quarterly earnings releases provide benefits to investors, companies, or the marketplace separate and apart from the Form 10-Q report?

Are there sections of the Form 10-Q that are particularly informative for investors? How do the costs of preparation vary among different sections of the report?

Should the Commission permit companies to omit certain disclosures, so long as the information is provided elsewhere, such as on their Websites?

Among the bolder proposals under consideration is whether new rules should provide companies with flexibility regarding the frequency of their periodic reporting, rather than a mandatory quarterly or semi-annual model.

How would such a “chose-your-own” disclosure model work? The SEC could allow a company, as part of its initial public offering, to announce its chosen approach. But how would established companies adapt their schedule? Should a company be permitted to change its frequency of reporting as it desires? What would that process entail?

What competition issues might arise if companies in the same industry or sector choose different reporting schedules? How would the pros and cons of more frequent versus less frequent reporting be internally evaluated and selected?

One suggestion that, although not included in the SEC release, is also worthy of thematically similar debate is the concept of loyalty shares and super voting rights. Originated in Europe, the concept is that, as an antidote to short-termism, long-term shareholders in a company are rewarded with additional stock or voting rights. These plans are, essentially, a shareholder-friendly version of the dual-class shares that benefit company founders, executives, and other insiders with increased voting rights.

Ferrari’s $853.9 million initial public offering in 2015 was among the first times that this strategy was implemented by a company on a U.S. exchange.

Investors who bought into the offering were qualified to be part of the loyalty program after three years of continually holding their shares. The incentive provided them two votes for every share at the annual meeting.

Elsewhere in the world, Michelin and cosmetics giant L’Oreal have also offered “L-shares” and/or “fidelity bonuses” to investors.

This idea, like changes to reporting frequency, is also a longshot given its inherent controversy. For all the arguments saying loyalty shares would ease corporate volatility and create long-term value, there are opposing claims that these plans treat shareholders differently (creating litigation exposure) and could have a negative effect on liquidity. For better or worse, loyalty shares could also more closely align shareholder goals with those of management, entrenching the CEO and their team.

Legal challenges and political posturing will surely arise no matter how disclosure reforms are implemented. The SEC may have no paucity of ideas; what they will ultimately need to get the job done is the courage to fight for them. Time will tell.