President Donald Trump brought a long-simmering debate on Wall Street to the surface Friday when he prodded regulators to look into scaling back how often publicly traded companies report financial results.
Trump’s proposal — released via Twitter and prompted, he said, by a recent conversation he had with PepsiCo Inc. Chief Executive Officer Indra Nooyi — would do away with quarterly reports and move to a semi-annual system.
To those across the investing community who favor such an idea, it’s just what’s needed to reduce corporate costs, boost a flagging IPO market and get companies to move away from the sort of short-term focus that can harm long-term growth. To its detractors, it is, in the words of Hilton Capital Management’s Dick Bove, “a horrible idea.”
It would be a “major move to provide less information” at a time when investors’ access to information has “already been dramatically reduced,” Bove said.
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
However feasible or likely the plan is, the tweet does represent the sort of business-minded approach that corporate America hoped it would get from having a former executive in the White House. While Trump’s tax cuts and deregulation push have long earned their favor — and Friday’s proposal can be seen as part of that effort — he has also befuddled much of the business community by dragging the country into multiple trade feuds and by jawboning companies via Twitter.
Nooyi raised the issue while dining last week with Trump at his golf club in Bedminster, New Jersey, according to a person familiar with the discussion.
Many market participants “have been discussing how to better orient corporations to have a more long-term view,” Nooyi said in an emailed statement Friday. “My comments were made in that broader context, and included a suggestion to explore the harmonization of the European system and the U.S. system of financial reporting. In the end, all companies have to balance short-term and long-term performance.”
More Discussions
The discussion with Pepsi’s CEO wasn’t the first time White House officials have heard from the business community about quarterly reporting requirements. Other corporate leaders have raised the issue with White House officials, and the administration has been considering the issue for some time. The president’s economic team was also aware that well-known chief executives, including JPMorgan Chase & Co.’s Jamie Dimon, have publicly advocated for companies to stop offering quarterly profit forecasts.
The issue of the regulatory burdens of being a public company has recently taken center stage in part because Elon Musk used it as a rationale when he tweeted about taking Tesla Inc. private.
Europe and Japan
The change, if enacted, would have the U.S. following other countries in reducing the frequency of reporting requirements.
In Europe, companies and regulators in recent years have backed away from requiring quarterly financial statements. The European Commission adopted a rule in 2013 ending such a mandate. Japan gradually moved from bi-annual to quarterly reporting during the 2000s.
A top criticism is that companies are less likely to invest in their businesses if they are pressed to show profit gains every quarter.
Jim Dunn, CEO of Verger Capital Management, which oversees $1.7 billion for nonprofit investors including Wake Forest University’s endowment, said “short-termism is a real problem, from endowment returns measured annually, to stocks moving on quarterly earnings estimates.”
For buyers and sellers of stock, the change could encourage more thoughtful investing.
“Hedge funds that are obsessed with quarterly results are in fact speculating and not investing,” Dev Kantesaria, portfolio manager and founder of Valley Forge Capital, a Wayne, Pennsylvania-based equity hedge fund with about $340 million in assets.
‘Dark Period’
There are many potential downsides, including the prospect that fewer financial reports could encourage insider trading and exacerbate volatility around earnings.
“You have such a long dark period where there is no information going out to the public,” said Robert Pozen, senior lecturer at MIT Sloan School of Management and former vice chairman of Fidelity Investments. “You’re dramatically increasing the temptation for people to trade” on inside information, he said.
While the quarterly earnings season has a negligible impact on market-wide volume, it does coincide with an increase in price turbulence among individual companies. Using Bloomberg data that looks at 10-day volatility in single stocks since 2010, price swings during the four reporting periods are roughly 10 percent higher than in the rest of the year.
The SEC has been reluctant to make any changes in quarterly financial reporting, which has long been a cornerstone of U.S. capital markets.
SEC Chairman Jay Clayton, a Trump nominee, has said increasing the number of public companies and initial public offerings are among his top priorities. Still, Clayton hasn’t floated reducing the number of times that companies must disclose their financial performance each year.
Independence
The agency could make such a change on its own without Congress passing legislation, but that doesn’t mean it will, said David Martin, who previously ran the agency unit that oversees corporate filings.
The SEC enjoys some level of distance from the White House because it’s an independent agency. It’s rare for presidents to make public demands of such regulators. SEC spokesmen didn’t respond to requests for comment.
The U.S. Chamber of Commerce and other lobbying groups have blamed compliance burdens for preventing more companies from selling shares. A statistic they often point to is the drop in IPOs over the past 20 years. In 1996, almost 950 companies went public, according to data compiled by Bloomberg. That number fell to 237 in 2017.
Tom Quaadman, executive vice president of the U.S. Chamber Center for Capital Markets Competitiveness, pressed the SEC for reforms that would address short-termism.
“We would welcome an overhaul of the 1930s-era disclosure system that is not user-friendly and no longer meets the needs of a 21st century economy,” he said.
— With assistance from Toluse Olorunnipa, Matt Townsend, Michael McDonald, Miles Weiss, Felice Maranz, Chris Nagi, Melissa Karsh and Janet Lorin
