Quarterly financial reporting has long been a staple of U.S. securities regulation. Has that practice impaired the ability of companies to plan for the long term? Ostensibly, that question sparked the roundtable held last week by the Securities and Exchange Commission (SEC) Division of Corporation Finance, more commonly known as Corp Fin.
When the event was announced in May, SEC Chairman Jay Clayton pointed to the evolving needs of average investors. Given longer life expectancies and the broader shift in retirement planning to defined contribution plans such as 401(k) accounts, “Main Street investors are more than ever focused on long-term results,” according to Clayton. The head of the Commission indicated that he has concerns the current disclosure regime may be out of whack.
“Our public capital markets have a thirst for high-quality, timely and material information regarding company performance and corporate events,” Clayton said. “Our disclosure rules reflect that thirst for information and, in turn, the confidence of market participants in the quality and timeliness of public company disclosure fosters liquidity. But we should ask ourselves whether our disclosure framework and other regulations have encouraged a focus by companies—and not just securities traders—on the short-term over the long-term.”
The thinking goes that because corporate executives know they will come under fire if companies miss any publicly disclosed, quarterly earnings targets, it inhibits management’s ability to make investments with delayed payoffs. For instance, an often-cited academic study of 400 executives found that nearly four-fifths of them admitted to “sacrificing long-term value to smooth earnings.” Jon Lukomnik of the Investor Responsibility Research Center says it is one of the symptoms of what he calls “Economic Attention Deficit Hyperactivity Disorder.”
Yet, Cydney Posner of Cooley PubCo reported that when it came time to discuss quarterly reporting at the roundtable, “no one seriously suggested that moving from quarterly to semi-annual reporting would somehow be an antidote to short-termism.” The discussion focused instead on reducing the compliance burden associated with quarterly reporting. For instance, it was noted that the European Union has moved to semi-annual financial reporting.
The prospect of shifting to semi-annual reporting has apparently intrigued one influential person in the nation’s capital, President Donald J. Trump. Trump has already directed the SEC to explore such a move as a way to “make business (jobs) even better in the U.S.”
Corporate America would surely appreciate the relief from regulatory burden. On the other hand, governance watchdogs maintain quarterly reporting is a bedrock of financial transparency that benefits investors. With that in mind, it’s worth asking if the SEC’s nods to “short-termism” are really just cover for the Trump administration to enact an overhaul of the financial reporting rules.