A big change in reporting requirements
President Donald Trump has proposed eliminating quarterly earnings reports by U.S. companies, a practice that has been in effect for over 50 years. Since 1970, the U.S. Securities and Exchange Commission (SEC) has made public companies issue financial reports every quarter.
Trump would prefer to switch this to twice-yearly reporting, where firms would publish their results every six months. He thinks this would be a saver in terms of cost and enable business leaders to devote more time to the actual running of their businesses instead of attempting to reach short-term financial targets.
Why Trump wants the change
Trump responded to his reasoning in a social media post by comparing U.S. companies to Chinese companies. He said China is thinking in terms of 50- to 100-year planning when the U.S. companies are too focused on quarterly reports. “Not good!!!” he tweeted.
This is not the first instance of Trump bringing up the idea. During his first term, he asked the SEC to look into quarterly reporting, but nothing came of it at the time. Analysts indicate his renewed push now has a stronger chance of passing with SEC Chairman Paul Atkins leading the agency.
Who else supports the move?
Trump is joined by some professionals and companies. San Francisco-based Long Term Stock Exchange recently announced it would ask the SEC to do away with the quarterly requirement. The exchange, which aims for companies with long-term goals, has a founder in Eric Ries, who has groused that the financial system penalizes companies for failing to deliver short-term wins over steady growth.
The Trump administration has also supported the reduction of regulations on businesses, arguing that fewer regulations will boost growth and reduce expenses. This proposal is part of that broader effort.
The benefits of semi-annual reporting
The supporters of the proposal are of the opinion that quarterly reporting:
- Costs too much: It takes a lot of time and money for companies to prepare quarterly reports.
- Discourages going public: Some private companies avoid going public because they do not want the burden of quarterly updates.
- Distracts from growth: Managers in companies may spend too much time trying to ensure that they reach short-term targets rather than working on strategies for the future.
By reporting twice a year, they contend, companies may have less time for paperwork and more time for generating future value.
The downsides for investors
Not everybody thinks this would be an improvement. Quarterly reports are needed by investors because they provide a regular snapshot of how a company is doing, critics argue. Without them, investors might not get warnings of financial trouble or risk.
Sam Kampner, chief executive of research firm SalesCraft AI, wasn’t afraid to put things bluntly: “This could be great for long-term company builders but terrible for public market investors who need timely information. With less information, you’d be making less informed investment decisions.”
In other words, companies might benefit from lighter reporting requirements, but investors would probably be left with less transparency.
What the data tells us
The request by the U.S. business groups would not be a precedent. The U.K. abolished quarterly reporting obligations in 2014. A study in the Harvard Business Review in 2018 analyzed the result.
The effect was lukewarm, the study found. It did not completely heal short-termism in businesses, nor did it completely destroy transparency for investors. Investors and businesses adapted, with results midway through expectations.
This suggests that if the U.S. does decide to make the switch, the outcome might not be as extreme as both sides have predicted.
What’s next?
Analysts believe it would take at least six months for the SEC to develop and consider a specific proposal. TD Cowen analyst Jaret Seiberg believes there’s already a 60% chance the SEC will move from quarterly to semi-annual reporting.
He also pointed out that signs to look for include if SEC Chairman Atkins starts speaking publicly about the matter or puts it on the SEC’s Investor Advisory Committee agenda.
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