Donald Trump, populist and champion of the forgotten men and women, thinks public companies might be telling their investors what their financials look like too often. Instead of reporting four times a year, he’s asking the Securities and Exchange Commission whether or not that can be cut down to two.
The president on Friday tweeted that he had consulted some of the world’s “top business leaders” and asked what would improve life for them in the United States. The response, he said, was to stop quarterly earnings reporting, as is currently legally required in the US, and instead go to a six-month system.
“That would allow greater flexibility & save money,” Trump wrote. “I have asked the SEC to study!”
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!
— Donald J. Trump (@realDonaldTrump) August 17, 2018
The assertion — including why it was on Trump’s mind in the first place — was a bit of a head-scratcher. Short-termism on Wall Street can be problematic, but keeping investors in the dark about their financials may not be the best solution. JP Morgan’s Jamie Dimon and Berkshire Hathaway’s Warren Buffett in an op-ed in June complained about the matter, but they took issue with companies providing quarterly earnings guidance — a company’s prediction of its near-term profits or losses — not quarterly reporting overall.
When companies go public — meaning they list on a stock exchange for investors to buy and sell their shares — they agree to certain transparency requirements that private companies don’t have, including the quarterly reports that outline items such as their earnings, revenue, profits, debts, and losses. Though those reports have been required for decades, there’s an ongoing push-and-pull among corporations and federal regulators about what publicly traded companies should have to tell investors and when.
On the one hand, you don’t want companies to have to disclose so much that it becomes so burdensome and expensive that they’d rather stay private. On the other, you don’t want companies to be so opaque about their operations that shareholders ultimately get burned, or they get skirt around any sort of social responsibility. For example, corporate America and regulators have tussled over regulations that require companies to disclose the ratio between CEO and worker pay and that make them disclose whether conflict minerals are in their supply chain.
But in taking aim at earnings reports, Trump isn’t targeting a recent addition to public company disclosure requirements — he’s taking aim at a system that’s been in place for years. Even a couple of days later, how exactly this piqued his interest isn’t entirely clear.
Pepsi’s Indra Nooyi supposedly turned Trump onto the idea
Trump in his initial tweet on Friday said that a business leader had tipped him off to the whole quarterly-earnings-are-bad idea. And later in the day, he revealed who the tipster was: outgoing PepsiCo CEO Indra Nooyi, who brought it up to him at a dinner he held with her and other business leaders at his golf course in Bedminster, New Jersey.
“I asked, ‘What can we do to make it even better?’” Trump told reporters Friday of the exchange with Nooyi, according to the Wall Street Journal. “And she said, ‘Two-time-a-year reporting, not quarterly.’ I thought of it. It made sense. We are not thinking far enough out.”
Nooyi in a statement after Trump’s remarks acknowledged she brought the matter up but said it was part of a broader context of “how to better orient corporations to have a more long-term view.” Nooyi, who is part of the CEO association Business Roundtable, reportedly brought up a release from the group in June advocating companies shift away from issuing quarterly earnings guidance, and mentioned maybe the US’s system should be more like Europe’s bi-annual one.
“In the end, all companies have to balance short-term and long-term performance,” she said.
The SEC appeared to have been caught off-guard by Trump’s tweet, and hours passed before it released a statement.
SEC Chairman Jay Clayton said in a statement that the president had highlighted a “key consideration” for American companies, investors, and families in bringing up the importance of a long-term focus and that many market participants “share this perspective.”
“Recently, the SEC has implemented — and continues to consider — a variety of regulatory changes that encourage long-term capital formation while preserving and, in many instances, enhancing key investor protections,” Clayton said, adding that it continues to look at publicly company reporting requirements, including frequency.
US companies have been reporting quarterly financials since the Great Depression
The Securities Exchange Act of 1934, passed in the wake of the 1929 stock market crash, mandated that public companies report their sales, profits, and balance sheets quarterly and annually in order to give investors and regulators a fuller picture of what’s going on inside of public companies financially. Disclosure requirements were strengthened by the Sarbanes-Oxley Act in 2002, which was passed in response to the collapse of energy company Enron, security company Tyco, and telecommunications provider WorldCom.
Not everybody does it this way — the European Commission, for example, as of 2013 only requires semi-annual financial reports from companies there. (European companies that list on exchanges in the US as well still have to report quarterly.) So, the thought process goes, the US could adopt a similar system — the type of harmonization Pepsi’s Nooyi was suggesting.
Doing so might help address problematically short-term thinking in corporate America: Companies are increasingly under pressure from investors to make money fast, and corporate earnings seasons can almost turn into gambling sessions where companies lay out guidance, analysts put out estimates of how much they think a firm will make in a given quarter, and whether or not they make that semi-arbitrary benchmark determines whether their report is a hit or a miss.
Dimon, the CEO of JPMorgan, and Buffett, billionaire investor and chief executive of Berkshire Hathaway, complained about just that in a June Wall Street Journal op-ed, saying that short-termism harms the economy. They said public companies should move away from providing quarterly earnings-per-share guidance, which “often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth, and sustainability.”
But the pair didn’t say that quarterly and earnings reports should be scrapped. In fact, quite the opposite:
Transparency about financial and operating results is an essential aspect of US public markets, and we support being open with shareholders about actual financial and operational metrics. US public companies will continue to provide annual and quarterly reporting that offers a retrospective look at actual performance so that the public, including shareholders and other stakeholders, can reliably assess real progress.
If a company wants to be publicly traded, then it owes it to shareholders, regulators, and, to a certain extent, the public to say how it’s doing. (Part of the reason Elon Musk is talking about taking Tesla private is that he doesn’t want to have to deal with public scrutiny and investor demands.) If you’re betting at the racetrack, you’d rather be picking the horses with the best track record than the ones with the prettiest names.
Without regular reporting, investors could be caught by surprise if and when something goes wrong. Moreover, reducing transparency would give corporate insiders even more of an advantage over everyday investors on the ins and outs of a company’s operations.
It’s not clear whether the shift in Europe is making a big difference. A 2016 study from researchers at London Business School and Indiana University found that after Europe shifted to a semi-annual reporting system, investors went looking for price-relevant information elsewhere, including in US quarterly reports from comparable companies, and were overreactive to what they found.
Conversely, when the United Kingdom in 2007 moved reporting requirements to quarterly from semi-annual, it didn’t lead to lower levels of long-term investments. And when it 2014 it followed the EU’s directive and got rid of quarterly reporting requirements, most UK companies kept with quarterly reports, and the companies that switched back to semi-annual didn’t increase investment levels.
Ending earnings guidance isn’t the only proposal out there to combat short-term thinking on Wall Street. Curbing stock buybacks, a practice where companies repurchase their own shares from investors, often resulting in a temporary boost in stock’s price, could also be effective. So could reining in so-called “activist investors” who buy large numbers of a company’s shares to try to get seats on the board or effect change within the company, often in order to make money on their investments fast.
Sen. Elizabeth Warren (D-MA) this week also introduced the Accountable Capitalism Act, which would, among other things, require corporate executives to hold shares of the companies they run for five years after receiving them and three years after a buyback.
And as for Trump, any changes to SEC reporting won’t affect him personally — The Trump Organization is a private company.