David Zaring is an associate professor of legal studies & business ethics at The Wharton School of the University of Pennsylvania. The opinions expressed in this commentary are his own.
President Donald Trump has asked the SEC to consider requiring publicly traded companies to disclose results twice per year, rather than quarterly.
"That would allow greater flexibility & save money. I have asked the SEC to study!" he tweeted last week.
He's not the only one to favor the idea. Executives of publicly traded companies often complain about the short-termism wrought by quarterly reporting requirements. Indra Nooyi, the soon-to-be-retired CEO of Pepsi, suggested a harmonization with the European financial system, which did away with mandatory quarterly reporting in 2013. Elon Musk, the CEO of Tesla, has complained bitterly about the importance of meeting quarterly earnings targets. Warren Buffett and Jamie Dimon have also come out against quarterly earnings guidance.
But before abandoning the principles of disclosure that have made America's capital markets the deepest and most liquid in the world, regulators need to consider the consequences of loosening reporting requirements for public companies.
Sticking with quarterly reporting makes more sense, for three reasons:
1. It builds trust
Investors pick company stocks with care and hope, but they don't always know if there is a good reason to trust the entrepreneurs and managers behind that company. They might particularly worry as those roles change, new CEOs are hired, and new business models or product lines are pursued.
Investors want to verify that their trust is warranted. Quarterly reports are one way to do that. They give investors lots of information about how the management team's plans are working out, on a regular basis.
Analysis: Trump is right. Quarterly reporting needs to go
For this reason, many people think investors are more willing to part with their money when they know they will be receiving these regular updates. Quarterly reporting accordingly reduces the cost of capital even if it creates some burdens for their firms that are receiving that cheaper capital. In other words, the trade-off is worth it.
2. Regular reporting is practical
Quarterly reports are no doubt painful to generate, verify and file. But eliminating half of them still leaves in place the duty to file 8-Ks, which announce potentially market-moving corporate news immediately to investors, or the obligation to comply with Regulation FD, which limits the freedom that managers have to talk to particular investors without sharing that information with the market as a whole. Plus, annual and semiannual reports will still be obligations. So publicly traded firms will still need to be prepared to put out reports on a regular basis.
3. Short- and long-term investors should want the same kind of reporting
CEOs claim that if they do not meet their quarterly numbers, investors will punish them, which discourages long-term thinking. But it's not clear why this is a problem of reporting. A share of stock is worth the present value of its expected future cash flows, whether the owner plans to keep the stock until she retires, or sell it in the next year. In other words, both patient and impatient investors should value shares the same way, and their valuation should not change if companies report results two or four times per year. The problem is not the frequency of disclosures — it is the restlessness of investors.
Still, there is that blue ribbon list of corporate executives who say that quarterly reporting pushes them to think only about the short term.
Are there ways to address their concerns? I can think of two:
The federal corporate charter that Senator Elizabeth Warren has proposed in her Accountable Capitalism Act might do the trick. That charter would require corporations to take the interests of "stakeholders" and others affected by corporate decision-making into account, along with the interests of shareholders. It would also give workers 40% of the seats on corporate boards.
Senator Warren's solution addresses short-termism not by changing reporting requirements, but rather by changing the number of people to which executives are responsible. If a company's actions were justified by the need to act on behalf of stakeholders, shareholders would have less of an outsized influence.
For example, shareholders would have little basis to complain if a company under such a charter announced that it was going to leave a factory open so as not to disrupt the community in which the factory was located. They might also have a difficult time making a case for dividends or buybacks, if executives gave raises to workers instead. Freed from such gripes, corporate executives could take a long-term perspective, though they would not have to do so.
But investors might not want to invest in firms pursuing those interests. So another thing that might help is making it easier to invest in private companies.
Staying private is the easiest way to avoid the drumbeat of quarterly obligations. In the past, few firms could grow big while staying private. But that is no longer the case. Companies like Uber have raised billions of dollars in the private markets, and some fintech firms are worth between $50 billion and $150 billion.
These firms have expanded, even without tapping into the broad pool of average investors. An SEC really worried about the reporting obligations for some firms should want to be sure that these private markets are vibrant, and that smaller investors are able to easily access them.
