President Trump recently announced that he is directing the Securities and Exchange Commission (SEC) to consider lifting public companies’ requirement to file quarterly financial reports and instead report financial results every six months. Investors in common stocks may be wondering what this means for them moving forward.
The proposal, like any, has both costs and benefits. The major cost is that investors will have less frequent transparency into a public-company’s finances. Presumable, however, companies would still have to file a form 8-K for intermediate “material” events. The benefit (or hope) is that less frequent reporting will both reduce the investment industry’s short-term focus and allow corporate executives greater freedom to concentrate on creating long-term value for their shareholders.
I’ve long been a critic of the investment industry’s fascination with quarterly earnings per share (EPS). The metric is largely meaningless for long-term investors, and the amount of intellect and resources devoted to guessing a company’s quarterly EPS is staggering. And this rampant “short-termism” has been noted by many business and finance leaders. In a recent op-ed piece, financiers Warren Buffett and Jamie Dimon recommended that public companies end the practice of providing quarterly EPS guidance. The pair stated: “In our experience, quarterly earnings guidance often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability.” While Buffett and Dimon did not explicitly call for less frequent reporting, their disdain for corporate short-termism was clear.
The implications of this short-term, quarter-by-quarter focus on small investors is clear. The number of publicly-listed companies has approximately halved in the last twenty years. This is the result of fewer initial public offerings, corporate consolidation, and “going-private” transactions via leveraged-buyouts. Companies are finding public markets a less attractive place to raise capital, especially in their early stages. This reluctance of growing companies to “go public” denies small investors the opportunity to participate in the value created by growing, innovative companies.
As every long-term investor knows, most of a company’s informational substance comes from the annual report filed on form 10-K. However, quarterly reports can provide the investor with important up-to-date information, particularly relating to a company’s financial position. In this sense, it is not quarterly reporting per-se which causes the rampant, short-term speculation predominating public markets. Rather, it is the investment industry’s fascination with quarterly results, to the exclusion of more beneficial metrics, which causes small investors harm.
As long-term investors, we view stocks in the same way we view real estate and other private assets in that stocks should be traded infrequently, and investors’ decisions should be anchored to thorough due-diligence. Whether less-frequent reporting will encourage more investors to behave prudently is an open question.