investing

Is President Trump Right About Why Quarterly Earnings Reports Are Wrong?

Requiring companies to post results too often may discourage long-term investment, but requiring them to report too little can leave investors in the dark for too long.

Kiplinger’s spoke with Charles K. Whitehead, a professor at Cornell Law School who specializes in corporations, financial markets and business transactions. Read on for an excerpt from our interview:

President Trump recently asked the Securities and Exchange Commission to study whether publicly traded companies should report earnings on a six-month basis. What’s the problem with quarterly reporting? You manage what you measure. When you’re assessed on three-month results, you’re going to focus on hitting three-month numbers. Company executives don’t think about three years down the line; they think about the company three months down the line. That’s not very healthy.

Would a move to six-month reporting reduce short-term thinking? It could help. Reviewing and signing off on the Form 10-Q, getting on the phone with reporters, dealing with the brouhaha of press reports and analyst commentary—all of that chews up time. Having to do that twice a year rather than four times frees up resources. And there is some historical evidence that investments by companies in longer-term projects (for example, research and development) dropped slightly when quarterly reporting was introduced in 1970.

What else contributes to the short-term thinking? When companies release forecasts of their upcoming quarterly earnings, which isn’t required by the SEC, and then fail to hit that number, the result can be devastating for the company.

Another factor is the average tenure for CEOs is declining. If you’re a CEO, are you thinking eight years out if your firm’s average term is six years? Maybe not so much.

What would be the downside of less-frequent reporting? The cost is less information in the public marketplace, and that has ramifications. Giving investors less information to act on would likely increase speculation in the stock market. Executives, then, would face even greater pressure to avoid showing, say, a short-term decrease in profits, even if the company is spending for a future project.

What should investors take away from the President’s message to the SEC? The White House, the SEC and even some prominent Democrats are interested in a longer-term approach to corporate management. But none of these factors, be it quarterly reporting or earnings guidance or CEO tenure, will solve the problem in isolation. All those things need to be wrestled with. It’s going to be a long time coming.

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