A Friday in August may not seem like the opportune time to launch a new policy initiative, but President Trump’s Aug. 18 tweet has nevertheless grabbed the attention of business leaders with its call on the Securities and Exchange Commission to end quarterly earnings reports:
“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!”
As expected for such a bold proclamation—especially one from such a polarizing figure—social media responses have expressed both accolades and fear. Among the posted reactions on Twitter:
“Quarterly reporting is important to the transparency and health of our public capital markets. The requirement to report regularly results in greater discipline and improved controls over financial reporting at companies and better and more timely information for investors.”
“How is this friendly for investors who need to see the seasonal and cyclical changes to companies’ [revenues], NI [net income], and other important metrics? This will only incur further risks to investors and reduce the capital needs for public companies.”
“Terrible idea. Create as much transparency and information as possible. What you really need to do is get rid of Sarbanes-Oxley. These top CEO’s are often rent seekers, not competitors.”
“A rare event where Trump's idea can actually promote, not obstruct sustainability in business.”
What reflexive Trump critics (and perhaps the man himself) may not recall is that the shift away from quarterly earnings was among the planks of presidential candidate Hillary Clinton’s economic platform. She addressed the topic during a 2016 speech at New York University’s Stern school of business.
“A survey of corporate executives found that more than half would hold off making a successful long-term investment, if it meant missing a target in the next quarterly earnings report. In another recent survey, more than 60 percent said the pressure to provide short-term returns had increased over the previous five years,” Clinton told the audience. “Consider this fact: We also know that publicly held companies facing pressure from shareholders are less likely to invest in growth opportunities than their privately held counterparts.”
As an antidote to “quarterly capitalism,” Clinton suggested the need to better align market incentives for long-term growth.
“Quarterly capitalism has developed over recent decades,” she added. “It is neither legally required nor economically sound. It's bad for business, bad for wages, and bad for our economy. … Real value comes from long-term growth, not short-term profits.
“American business needs to break free from the tyranny of today's earning report, so they can do what they do best, innovate, invest, and build tomorrow's prosperity. It's time to start measuring value in terms of years, or the next decade, not just the next quarter.”
“I’ve seen how pressure to produce forecasted results distort business decisions in a myriad of ways. Companies, shareholders and, indeed, our country would be better served by focusing on concrete metrics and fundamentals rather than pre-emptive commitments to short-term performance.”
Berkshire Hathaway CEO Warren Buffett and JPMorgan Chase CEO Jamie Dimon have also advanced the argument to unwind from the nation’s quarterly earnings addiction. In June, they co-authored an opinion piece in the Wall Street Journal, “Short-Termism Is Harming the Economy.”
“Public companies should reduce or eliminate the practice of estimating quarterly earnings,” they wrote. “In our experience, quarterly earnings guidance often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability.”
“I’ve seen how pressure to produce forecasted results distort business decisions in a myriad of ways,” Buffett said, independently of the article. “Companies, shareholders and, indeed, our country would be better served by focusing on concrete metrics and fundamentals rather than pre-emptive commitments to short-term performance.”
The Business Roundtable, a group of chief executive officers of major U.S. corporations formed to promote pro-business public policy, similarly weighed in on the topic in June.
It announced its support “for companies moving away from an expectation of providing quarterly earnings per share guidance and potentially dropping such guidance in the future.”
“Championing long-term value creation for shareholders has always been a central tenet of Business Roundtable,” the group said.
Longer-term targets and goals could include appropriate key performance indicators or other specific metrics that provide a basis for assessment of current and future performance, the group says. It opined that moving away from quarterly earnings per share guidance “will not diminish the information and transparency engaged shareholders require, nor will it render management less accountable.”
Clear communication of a company’s strategic goals—coupled with informative, tailored metrics that can be evaluated over time—will always be critical to shareholders, the Business Roundtable says. This information, which may include non-financial operational performance, should be provided on a timeline deemed appropriate for the needs of each specific company and its investors, whether annual or otherwise.
“Importantly, companies will still of course provide quarterly reporting—the retrospective reporting of actual performance that allows investors to assess concrete progress against strategic goals—and any clarification or update of annual guidance as needed,” it wrote. Companies should strive to offer realistic projections and “avoid making short-term decisions that are inconsistent with their long-term strategies simply to beat short-term performance benchmarks.”
The concept also passes muster with the pro-shareholder Council of Institutional Investors.
“America’s current and future retirees deserve to know that their savings are being invested based on reliable metrics and accurate reporting,” said executive director Ken Bertsch. “When companies are managed for the long term, it creates value for shareholders with long investment horizons. Practices that encourage long-term thinking and investment create value for millions of Americans without sacrificing the transparency and accountability that investors deserve.”
In a statement on Friday, CII reiterated its belief that public companies should continue to report quarterly on their financial performance.
“Investors and other stakeholders benefit when regulations ensure that important information is promptly and transparently provided to the marketplace,” said Amy Borrus, CII’s deputy director. “Investors need timely, accurate financial information to make informed investment decisions.”
CII shares the view of the SEC’s Investor Advisory Committee that “the current degree, quality and frequency of disclosure for U.S. issuers overall is appropriate and a source of strength for the U.S. capital markets.” It also generally supports the SEC’s outstanding proposal to delete redundant or overlapping disclosure requirements. It says, however, that public companies should have flexibility on whether and how often to issue earnings guidance.
Rethinking quarterly earnings is far from a new or novel concept.
In February 2006, Laurence Fink, co-founder and CEO of BlackRock, the world’s largest investment firm, offered his take, urging “resistance to the powerful forces of short-termism affecting corporate behavior” and calling “today’s culture of quarterly earnings hysteria contrary to a much-needed long-term approach.”
Annual shareholder letters and other communications to shareholders are “too often backwards-looking and don’t do enough to articulate management’s vision and plans for the future,” Fink said. “This perspective on the future, however, is what investors and all stakeholders truly need, including, for example, how the company is navigating the competitive landscape, how it is innovating, how it is adapting to technological disruption or geopolitical events, where it is investing, and how it is developing talent.”
“As part of this effort, companies should work to develop financial metrics, suitable for each company and industry, that support a framework for long-term growth,” he said. “Components of long-term compensation should be linked to these metrics.”
Over time, as companies do a better job laying out their long-term growth frameworks, the need will diminish for quarterly earnings per share guidance, Fink said he would then urge companies to move away from providing it.
“To be clear, we do believe companies should still report quarterly results—long-termism should not be a substitute for transparency,” he said. “But CEOs should be more focused in these reports on demonstrating progress against their strategic plans than a one-penny deviation from their EPS targets or analyst consensus estimates.”
In 2009, a coalition of leaders from the business, investment, government, academic, and labor communities endorsed actions to address market short-termism and a focus by companies and investors on long-term performance.
Their statement, "Overcoming Short-termism: A Call for a More Responsible Approach to Investment and Business Management," was billed as "a bold call to end the focus on value-destroying short-termism in our financial markets and create public policies that reward long-term value creation for investors and the public good."
The recommendations for addressing shareholder short-termism included:
Encourage more patient capital through tax policy;
Better align the interests of financial intermediaries and their ultimate investors; and
Strengthen investor disclosures.
Overseas, neither the EU nor U.K. require quarterly financials following 2013 legislation.
The American Accounting Association shared its thoughts on quarterly earnings reports versus longer-term corporate strategy. “With regulatory reform a high priority for the Trump administration, a recent study focuses on one possible target—and it’s a fat one—the half-century-old SEC rule mandating the filing of quarterly financial reports by public companies,” it wrote in a statement following Trump’s Twitter-posted trial balloon.
“What has been absent until now is large-scale evidence of the advantages less frequent reporting offers to companies and their shareholders,” it wrote. “The research challenge: How to compare the effect of reporting frequency when all U.S. companies have to file quarterly.”
A study in the March issue of The Accounting Review, a peer-reviewed journal published by the American Accounting Association, works around this problem by analyzing evidence from periods when reporting-frequency mandates changed in the United States, permitting before-and-after comparisons to be made.
The study, “Frequent Financial Reporting and Managerial Myopia,” concludes that shorter reporting intervals engender "managerial myopia" that finds expression in a "statistically and economically significant decline in investments" along with "a subsequent decline in operating efficiency and sales growth."
“Our evidence supports the recent decision by the EU and the U.K. to abandon requiring quarterly reporting for listed companies with an apparent intent to preventing short-termism and promoting long-term investments," wrote the study's authors, Rahul Vashishtha and Mohan Venkatachalam of Duke University's Fuqua School of Business and Arthur Kraft of the Cass Business School of City University London.
The professors report that, when new regulatory mandates forced companies to increase the frequency of their financial reporting, they reduced their annual capital investments by about 1.5 percent, or 1.9 percent of their total assets, depending on how capital investments are defined. Considering that the average annual capital investments of these firms amounted to about 9 percent of assets, those were “hefty cuts.”