Should the U.S. move to a six-month financial reporting calendar from the current quarterly one as President Donald Trump mooted in an early Friday tweet?
Not really, according to many investors and analysts, who argue that shareholders need more disclosure from the companies they invest in and not less. And while many executives — Elon Musk, anyone? — argue that the burden of striving to meet quarterly estimates can lead to short-termism on the part of managers and shareholders, there’s no guarantee that a different reporting schedule would change that.
“If the charge is that companies are managing for short-term expectations, what will be the difference between a three-month cycle and a six-month cycle? Nothing,” said Leigh Drogen, founder and chief executive of Estimize, a platform that crowdsources earnings estimates and economic forecasts.
“A six-month cycle will also lead to increased volatility given less access to hard information regarding the performance of companies,” Drogen said.
“I understand CEOs’ frustration with short-term [reporting], but the solution is not to hide critical information from investors. [President Trump’s] proposal would raise the cost of capital for public companies and weaken our markets’ global competitiveness.” Mercer Bullard, Butler Snow lecturer, professor of law, University of MississippiTrump said that the idea of changing reporting requirements came from outgoing PepsiCo Inc. PEP, +0.62% Chief Executive Indra Nooyi, a longtime critic of the current system who has argued that the pressure to meet short-term goals clouds longer-term targets. The president has asked the Securities and Exchange Commission to review the issue.
“I have the results to show for long-term management and the scars to show for short-term management, “Nooyi told a panel at the World Economic Forum’s annual meeting in Davos this year, as Business Insider reported.
The executive was harshly criticized by analysts during the period in which she worked to move PepsiCo away from sugary drinks and salty snacks toward healthier products with her “Profits with Purpose” strategy. After her first five years as CEO, there were calls for her ousting as sales slowed, profits missed targets and the stock languished.
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Nooyi suggested her 12-year tenure as CEO would offer a good case study for her insistence on taking a longer view. PepsiCo has beaten profit estimates for the past 20 quarters, according to FactSet, as her strategy paid off and got the company back on a growth track.
SEC Chairman Jay Clayton said his agency has already implemented measures that aim to “encourage long-term capital formation while preserving, and in many instances, enhancing key investor protections.”
The SEC’s Division of Corporation Finance “continues to study public company reporting requirements, including the frequency of reporting,” he said in a statement.
But if the idea is to get companies to focus on longer-term results over shorter-term performance, some feel that increasing the time between reports by three months won’t make much of a difference.
“I think it’s negligible,” said Wayne Thorp, vice president and senior financial analyst at the American Association of Individual Investors. “It’s a step in the right direction, but I don’t think it would impact the individual investor that much. It’s lip service.”
To be sure, companies would prefer not to have the burden and expense of quarterly reporting, which includes the need to rehearse for conference calls with analysts. And companies have become expert over the years at gaming the system so that they beat consensus forecasts and enjoy the subsequent stock gains.
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That expertise has meant that earnings have beaten forecasts at a faster rate over time, as Jill Carey Hall, equity and quant strategist at Bank of America Merrill Lynch, told MarketWatch in June.
“There is a tendency by corporations to set conservative numbers so that EPS beats come through,” Hall said.
Booking Holdings Inc. BKNG, +0.86% the former Priceline, for example, regularly offers soft earnings guidance, only to then “beat” that guidance when it reports, as MarketWatch has previously reported. See The Sniff Test about Priceline’s tendency to set the bar low.
Billionaire investor Warren Buffett BRK.B, +0.28% and JP Morgan Chase & Co. JPM, +0.00% Chief Executive Jamie Dimon have argued that companies should stop offering quarterly guidance and switch their focus to longer-term issues. The two executives support the release of quarterly earnings reports, but believe the practice of guiding for the next quarter creates short-termism that is damaging to the economy.
“In our experience, quarterly earnings guidance often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability,” they wrote in a Wall Street Journal commentary piece.
But John Kay, U.K.-based economist and author of “Other People’s Money: The Real Business of Finance,” says it’s the practice of reporting every quarter that causes short-term thinking.
“What is changing in three-month intervals does not tell us anything about how a company is positioned to deal with long-term growth,” Kay said in a recent interview with MarketWatch.
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Kay was tasked with reviewing activity in U.K. equity markets and the impact on long-term performance and governance of listed companies and recommended eliminating quarterly reporting in favor of six-month’s and phasing out guidance. His other recommendations included the adoption of a stewardship code, the establishment of a forum for collective engagement by investors, the clarification of fiduciary duties of trustees and their advisers, and the rebating to investors of all income from stock lending.
“Earnings reports cut through all the noise, and that’s what investors really need to see. It’s easy to get distracted. We need those earnings to keep [investors] on track, to keep them from going off the rails.” Karen Cavanaugh, senior market strategist, Voya Investment ManagementThe U.K. in 2014 dropped its quarterly reporting requirement, although about 90% of U.K.- listed companies still report that way, many because they are also listed in the U.S., the deepest and biggest capital markets in the world.
The academic world has attempted to evaluate the merits of quarterly versus semi-annual reporting with mixed results. A paper by Chicago Booth Professor Haresh Sapra and colleagues from the University of Illinois at Urbana-Champaign and the University of Minnesota published in 2014 found there’s a happy medium between too little disclosure and too much delivered too often.
“Since markets are forward looking, any actions that favor the short term at the expense of greater long-term value creation would be effectively punished by lower capital market prices,” said the paper. Overreporting can be expensive and could make it more attractive for companies to do anything to produce quick profits. “Such pressures disappear when reporting frequency is decreased,” the paper found.
But some industry analysts said reduced reporting could actually increase costs for companies, as lenders could require higher interest rates to compensate for the increased uncertainty from less information.
“I understand CEOs’ frustration with short-term [reporting], but the solution is not to hide critical information from investors,” said Mercer Bullard, Butler Snow lecturer and professor of law at the University of Mississippi. “[President Trump’s] proposal would raise the cost of capital for public companies and weaken our markets’ global competitiveness.”
Karen Cavanaugh, senior market strategist at Voya Investment Management, said regular earnings reports are necessary and good for investors, because they provide a check point on how macro developments, such as tax cuts and tariffs, can affect companies and the economy.
“Earnings reports cut through all the noise, and that’s what investors really need to see,” Cavanaugh said. “It’s easy to get distracted. We need those earnings to keep [investors] on track, to keep them from going off the rails.”
Howard Berkenblit, partner and head of the capital markets group at the law firm Sullivan & Worcester, agreed that quarterly reporting serves a “useful function” for both companies and investors.
For companies, reporting twice a year instead of four times would save some money and resources, but they could find it challenging to “talk freely” to institutional investors and lenders about their business and outlook, unless that information has been fully disclosed to the public, as Regulation FD (Fair Disclosure) requires. And if companies are going to do the work to update investors, it wouldn’t be that much more of a burden to disclose the information officially, Berkenbilt said.
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For investors, it’s hard to argue that less information is ever better than more information. And for small investors, who are already unable to keep up with high-speed and algorithmic trading machines that can scrape information from multiple sources in the blink of an eye would likely be even more disadvantaged if those programs were to become more aggressive.
“I see it as maybe a hard sell, since investors and analysts still want that information, and may not want to wait that long to know what’s going on with a company,” Berkenblit said. “Is the saving really worth it, for the benefit to the investment community that you give up?”
Drogen from Estimize said fans of long-term planning often use Amazon.com Inc. AMZN, -0.23% as an example of a company that was able to thrive despite the many years in which it failed to show a profit.
“Investors love to point to Amazon and Jeff Bezos when it comes to long term thinking and investments, but they are sorely mistaken if they believe the market is willing to given that kind of benefit of the doubt to every managerial team,” he said.
“In a time when technological disruption risk is increasing significantly, investors need more information at a more rapid clip in order to assess the health of businesses, not less,” he said.
Amazon shares have gained 60% in 2018, while the S&P 500 SPX, +0.33% has gained 6.3% and the Dow Jones Industrial Average DJIA, +0.43% has added 3.6%.
Additional reporting by Anora M. Gaudiano
