President Donald Trump has tasked regulators with changing the way public companies have operated for more than 50 years. While the shift to move away from quarterly earnings reports has significant support from officials, the industry is divided on whether the move would reduce shareholder transparency or maintain business as usual on Wall Street.
Trump calls for changes to reporting
“Subject to SEC approval, companies and corporations should no longer be forced to ‘report’ on a quarterly basis, but rather to report on a ‘Six (6) month basis,’” Trump wrote last week on Truth Social.
“This will save money and allow managers to focus on properly running their companies,” he continued. “Did you ever hear the statement that, ‘China has a 50- to 100-year view on management of a company, whereas we run our companies on a quarterly basis???’”
The Securities and Exchange Commission, the agency tasked with protecting investors and promoting fairness in securities markets, will take up the president’s request.
“I welcome that posting by the president, and I have talked to him about it,” SEC Chair Paul Atkins said in an interview with CNBC’s “Squawk Box” on Friday. “In principle, I think to propose change in what our rules are now, I think would be a good way forward, and then we’ll consider that and move forward after that.”
Danielle DiMartino Booth, CEO of QI Research, said it has already affected Wall Street.
“I applaud this,” she told Straight Arrow News. “It certainly did freak out Wall Street, because there’s an entire media machine that runs every three months. Earnings season is like baseball season: It’s open, play ball.”
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Earnings season typically consists of several weeks each quarter when many of the nation’s largest companies release financial results.
This isn’t the first time Trump has called for changes to reporting frequency. During his first term, he posted on Twitter that top business leaders had urged him to “stop quarterly reporting & go to a six-month system.”
At the time, Trump called on the SEC to study the proposal. When SAN reached out to the commission for this story, a representative responded with a link to a call for public comment issued in December 2018.
DiMartino Booth, a Wall Street veteran, said there is truth to the idea that quarterly results encourage shortsightedness.
“As an individual who sits in the C-suite or on a board, you’re not able to plan for the longer term,” she said. “You’re not able to make investments in productive endeavors because you’re so concerned about what your earnings per share are going to be every three months, which happens to determine the size of your bonus.”
What is an earnings report?
Every publicly traded company is required by the SEC to publish earnings reports four times per year. They provide data on revenue, expenses and profit — giving shareholders a snapshot of the company’s health. Firms release one annual report and three quarterly reports.
As part of quarterly reporting, many companies hold investor calls, during which analysts question executives.
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Companies use quarterly earnings reports to inform shareholders of their financial health. These reports feature data including revenue, expenses and profit.
Some firms also issue “guidance,” which gives an estimate of future revenue, expenses and profit. Guidance is not required by regulators, it but has raised concerns that it encourages short-term thinking.
In June 2018, JPMorgan Chase CEO Jamie Dimon and Berkshire Hathaway Chairman Warren Buffett cowrote an op-ed in The Wall Street Journal encouraging public companies to stop providing quarterly earnings-per-share guidance. Focusing on the next quarter “often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability,” they wrote.
“I think this is a very rare instance of Warren Buffett agreeing with the president,” DiMartino Booth told SAN.
What are the SEC’s reporting rules?
Quarterly earnings reports have not always been required.
The SEC was founded in 1934 during the Great Depression with a mission of “protecting investors, maintaining fair, orderly and efficient markets, and facilitating capital formation.” The Securities Exchange Act of 1934 gave the commission power to require reports from public companies, but did not specify the reporting intervals.
The SEC began requiring semiannual reporting in 1955 and shifted to quarterly reports in 1970.
“It was transparency that made the quarterly number relevant and material to investors,” said Charles Elson, founding director of the Weinberg Center for Corporate Governance at the University of Delaware. “It’s a good measuring stick on company performance.”
But Elson said reducing reporting frequency would not solve the problem of shortsightedness.
“It’s kind of like saying, ‘if I want to get rid of a head cold, I’ll just chop off my head or my nose,’” he told SAN. “It doesn’t solve the problem.”
“The reason we have those reporting periods is that companies operate on a quarterly basis,” he added. “The board generally meets quarterly, and the quarterly numbers are a way to evaluate how the company is doing.”
How could the SEC’s rules change in the Trump administration?
There are two paths to implementing Trump’s proposal.
First, the SEC could issue a notice of proposed rulemaking, followed by a public comment period. Commissioners would review feedback, then vote on the change.
The second option would require Congress to pass legislation.
Sen. Elizabeth Warren, D-Mass., said the push undermines transparency.
“That is the whole point here,” Warren told Yahoo Finance. “The president doesn’t want the data released regularly because he knows he’s in trouble on the economy.”
DiMartino Booth warned that reducing reporting could have unintended consequences.
“If we did go into an information vacuum, that could backfire mightily and allow markets to be more — not less — volatile,” she said.
But some say the change would not significantly affect markets.
“I think it’s kind of an inconsequential idea, to be honest with you,” said Mark Higgins, author of “Investing in U.S. Financial History: Understanding the Past to Forecast the Future.”
“At the end of the day, demand for quarterly earnings reports comes more from Wall Street than from the SEC,” he told SAN. “Relieving that burden practically is probably not going to make that much difference.”
Still, he noted, quarterly requirements can discourage private companies from going public.
On Friday, Atkins said it is up to Wall Street to decide how often companies should report.
“For the sake of shareholders and public companies, the market can decide what the proper cadence is,” the SEC Chair told CNBC.
With Republicans holding a majority of SEC commissioners, analysts say the proposal has a real chance.
“We start with a 60% probability that the SEC switches to semiannual from quarterly reporting,” TD Cowen analyst Jaret Seiberg said in a note Monday. “The fact that this is an easy win for Atkins to deliver to Trump makes it more likely the prospects for action will rise rather than fall.”
