Before much of the country had eaten breakfast on Friday, the president had questioned decades of regulatory practice, remade the SEC’s near-term agenda, and drawn a line in the business community between management and investors. It all happened in a 7:50 am tweet. The president’s morning missive said that at the prompting of one of the “world’s top business leaders,” he had ordered the SEC to consider moving to a system in which public companies report their financials only twice a year, rather than quarterly. Drastic as it would be, the change appears to have support from more than one set of stakeholders. In fact, investors may be the only group to oppose it in any kind of organized way–and the strength of their expected backlash could be the only thing keeping it from becoming reality.
The presidential tweet caught many off guard, but it probably shouldn’t have. One of the hottest topics in the business world lately has been the desire to free public companies from the pressure to engage in short-term thinking, which many attribute to the quarterly reporting system. In a June op-ed that vilified “short-termism,” Warren Buffet and Jamie Dimon stopped short of proposing the end of quarterly reporting, but urged public companies to eliminate quarterly earnings estimates. Elon Musk’s quixotic plan to take his company private, meanwhile, was motivated by a desire to get away from the “quarterly earnings cycle” that puts “enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term.”
(Don’t tell the White House, but policies that encourage long-term thinking by businesses could also find support with Sen. Elizabeth Warren (D-MA), who just introduced the Accountable Capitalism Act, and Hillary Clinton, who lamented “quarterly capitalism” on the campaign trail.)
A semi-annual reporting schedule, the theory goes, will relieve this detrimental focus on the short term. There are other benefits, too. Compliance costs would decrease, and C-suite executives could reclaim significant time they now spend preparing for quarterly reporting and calls. There is also a factor mentioned by outgoing PepsiCo CEO Indra Nooyi, who, as it turns out, was the business titan to put the idea in the president’s head. According to her account, Nooyi mentioned to the president that the switch would harmonize the U.S. reporting system with that of the European Commission, which has been on a twice-a-year schedule since 2013.
The president’s idea could be getting a warm reception at the SEC, too. It certainly aligns with Chairman Clayton’s deregulatory agenda, as well as his desire to make the markets inviting to companies considering going public. At the same time, there’s no indication that the agency coordinated with the White House on the proposal. (It took the SEC a few hours to release a statement from Clayton, and it was a very cautious one at that.) More troubling for the SEC is that the proposal places it between the companies it polices and the investors it ostensibly serves.
With some notable exceptions (like Larry Fink), those investors appear ready to mount serious opposition to the idea. The main charge against it, of course, is that it reduces transparency on Wall Street, removing an important window into company operations for investors. There are other potential evils too, including an enhanced risk of insider trading with a longer “dark period.” As billionaire money manager Stanley Drunkenmiller pointed out in a Bloomberg interview, moving to a semi-annual schedule could also increase volatility.
For these reasons, investors are calling it a “horrible idea” (Hilton Capital Management’s Dick Bove) and “cockamamie” (Yardeni Research’s Ed Yardeni). Some believe the backlash from investors would be so strong that even if the change went through, companies would continue reporting on a quarterly basis to satiate them.
We won’t have to contemplate that possibility unless and until the SEC acts. The Wall Street Journal is reporting that this week, the SEC is going to officially seek input on promoting a long-term focus within public companies. The strength of the investor pushback could dictate how the agency responds to the now-famous Friday morning tweet.