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In a tweet Friday morning, President Donald Trump floated the idea of allowing companies to report their results just twice a year as opposed to quarterly. Trump asserted that such a change would “allow greater flexibility & save money.”
Trump said he had asked the Securities and Exchange Commission to study the topic, which Trump said came up in a conversation with “top business leaders.” (The President hosted a dinner for a group of CEOs during his current 17-day “working vacation” at his golf club in New Jersey; he did not identify who suggested, “Stop quarterly reporting & go to a six month system,” as the tweet phrased it.)
Experts in corporate governance were skeptical.
“I don’t think this solution solves anything very much,” said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware.
Given the president’s business background, Elson pointed out that Trump has firsthand experience with the expenses associated with quarterly filing requirements as well as pressure from investors, but he wasn’t convinced that switching from four times to twice a year would solve the problem of investors fixating on short-term performance.
While investors in a handful of companies — Amazon and Tesla, for instance — have been willing to tolerate poor quarterly earnings in return for the expectation of better long-term performance, most companies’ share prices are impacted by their quarterly results.
“A lot of shareholder and company organisations... have called for dropping them altogether and having a single annual call so that the board and executives can truly focus on the long term,” said Paul Hodgson, an independent corporate governance analyst. “Short-sellers and day traders may not like it, but the big mutual funds and most big corporations would like to ditch quarterly calls,” he said, on the grounds that corporate executives would be more likely to make long-term investments that wouldn’t produce a return right away.
Elson argued that cutting financial reporting requirements wouldn’t address the equity market’s propensity to focus on the short term, or its impact on corporate operations. “I don’t think necessarily this is going to change anything, because then people will manage to six months,” he said. “The issue isn’t how often you report it, the issue is, are the analysts too short-term in their expectations, leading to quarterly issues?”
Trump asserted that switching from three- to six-month reporting could save companies, money, but this could instead simply shift the cost burden onto investors.
“It would save corporate executives a lot of time with regard to filings and disclosures, so it would be more efficient. On the down side, the people who manage money ... would get less detail of what’s going on with the business,” said Gerald Sparrow, president of Sparrow Capital. “That report is essential to our business.”
In the absence of quarterly feedback from companies themselves, Sparrow said money managers would be more likely to turn to third-party research and analytics providers to fill the gap — information they would have to pay for.
“Investors and advocates for investors have consistently favored quarterly disclosures,” said Marcus Stanley, policy director at advocacy group Americans for Financial Reform, who said investors could be at a disadvantage if they lose quarterly visibility into a company’s operations.
“Six months is just a long time in economic time in terms of things that can happen to a company,” he said.
In an op-ed in The Wall Street Journal this summer, Warren Buffett and JPMorgan Chase CEO Jamie Dimon floated one possible compromise, suggesting that public companies stop making predictions for future earnings. “Quarterly earnings guidance often leads to an unhealthy focus on short-term profits,” they wrote.
Dimon and Buffett defended the practice of reporting earnings quarterly, though, writing, “We support being open with shareholders about actual financial and operational metrics.”
There’s also the fact that quarterly accounting is a bedrock tenet of corporate financial infrastructure, and changing that with the stroke of a pen might not be feasible in any case, Elson said.
“The regulator can say six months, but if the street demands quarterly numbers, you’re going to get quarterly numbers.”