How Will Public Companies Respond to Semi-Annual Reporting?

Under Chairman Paul Atkins’ SEC, deregulation is starting to feel like the dessert menu offered after a satisfying meal. Public companies must be tempted by the offerings; at the same time, they may be thinking to themselves: “I couldn’t possibly.”

To wit: at a Washington conference last week, Atkins floated the idea of tying the frequency of mandated earnings reports to company size. His comments added fuel to a Wall Street Journal report that the SEC is preparing a proposal that would give public companies the option to disclose their financial results only twice a year, as opposed to quarterly.

The open question is: will companies indulge?

To be sure, there is defensible logic behind semi-annual reporting. Critics say the quarterly schedule discourages long-term thinking. Back in 2018, Jamie Dimon and Warren Buffet penned an op-ed urging companies to refrain from providing quarterly earnings-per-share guidance precisely because of the negative effects of short-term thinking. “The pressure to meet short-term earnings estimates has contributed to the decline in the number of public companies in America over the past two decades,” they wrote, noting that “[s]hort-term-oriented capital markets have discouraged companies with a longer term view from going public at all.”

You can almost hear the applause in the background from Atkins, who has expressed concern with the falling number of public companies and pushed to “make IPOs great again.”

There’s also the fact that while the quarterly schedule has been in place for more than 50 years in the United States, publicly traded companies in European countries have been allowed to file semi-annual reporting since 2013, with no obviously disastrous effects. The U.K. followed suit a decade ago. They, too, are still standing.

But even if the SEC pushed through its proposal, there is still the question of what impact it will have. The market’s experience with another recent offering from the deregulatory cart—the end of no-action letters—may be instructive.

In a change of policy last year, the SEC allowed companies to exclude most shareholder proposals from a vote by simply claiming a “reasonable basis” for the exclusion (instead of seeking a no-action letter from the SEC to shield themselves from liability).

Two interesting things happened in response. First, in some instances, companies have declined to take the new and easier route to excluding a shareholder proposal despite explicitly believing that they have good reason to do so. Disney included an anti-ESG shareholder proposal that it felt it had valid grounds to exclude; Costco did the same thing.

Some foresee a similar phenomenon happening with reporting frequency. Corporate governance authority Lawrence Cunningham told Dealbook: “What I predict will happen in America is a lot of companies will just continue to report quarterly even though they don’t have to.”

The reason why companies would refuse the SEC’s temptations does not involve cholesterol or waistlines, but rather litigation risk. A second consequence has been a shift in disputes from the SEC to the courts. Jones Day noted that in one recent month, shareholders “filed five lawsuits challenging the exclusion of their proposals under the SEC’s revised process. By comparison, there were fewer than 30 such lawsuits in the previous 50 years.” And some are getting results for shareholders.

If adopted, semi-annual reporting may offer companies greater flexibility, but it also introduces new considerations around disclosure practices and legal exposure. Companies will need to weigh the potential benefits of reduced reporting frequency against investor expectations for transparency and the possibility of increased litigation risk. In practice, many issuers may continue quarterly reporting to maintain market confidence and mitigate uncertainty, even if regulatory requirements are relaxed.

While it’s impossible to predict what might happen with a move to semi-annual reporting, transparency advocates suggest that “it could give companies greater opportunity to hide or delay the disclosure of bad news.” That sounds a lot like a recipe for litigation.

In the end, if offered, issuers might just say “I’m full, thanks.”

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