Wall Street took notice when a tweet from U.S. President Donald Trump announced he had asked the Securities and Exchange Commission to study the idea of moving public companies away from quarterly reporting to a six-month, or semi-annual, schedule. Along the same lines, Jamie Dimon and Warren Buffett, among others, have argued that the practice of providing quarterly guidance should be reduced or eliminated. These headlines underscore a prevailing opinion that a focus on short-term results can inhibit companies from executing on a long-term strategy that ultimately maximizes shareholder value. The global investment community may not be fully aligned with the proposed solutions to overcoming this challenge.
However, one thing remains constant: Investors demand and deserve transparency. According to Edelman research, 82 percent of institutional investors say trust in a company is a top driver of their investment decisions. To build that trust, transparency is critical and one of the many reasons why U.S. capital markets attract both companies and investors from all over the world. According to Ipreo, there is nearly $27 trillion in global capital invested in U.S. listed securities, more than twice the investment in European and Asian markets combined. There is no better market to access capital that drives growth, innovation and job creation than the U.S.
The decision to decrease the frequency of corporate reporting has the potential to negatively impact the inherent trust that U.S. public companies have historically received. Some investors fear that increasing the time between reporting periods may lower the level of management accountability and encourage riskier decision making. Further, a lack of corporate disclosure for an extended period of time could create increased market uncertainty and drive investment capital to the sidelines. This may result in unintended consequences for companies, most notably increased equity market volatility and a higher cost of capital across the public markets.
On the other side of the issue, some business leaders argue that the existing quarterly reporting structure creates an incentive for public company leaders to focus on prioritizing short-term results at the expense of long-term investment and future earnings growth. According to a 2016 McKinsey and FCLTGlobal survey, nearly 60 percent of executives said they would take action to avoid missing quarterly targets, including cutting discretionary spending or delaying projects. A move away from quarterly reporting could help deemphasize the need for hitting short-term earnings targets and provide management with greater flexibility to accelerate investments and advance growth initiatives that would ultimately drive long-term value.
Additionally, some experts argue that the current quarterly earnings system levies a significant burden on companies in the form of accounting fees required to audit quarterly disclosures. The impact of these fees is magnified for small-cap companies, which paid approximately $3,345 in annual accounting fees per $1 million in revenue, according to data from Audit Analytics and reported by The Wall Street Journal. It would be expected that a move from quarterly to semi-annual reporting would help lower the costs companies pay in annual accounting fees.
The discussion of alleviating quarterly reporting requirements also has implications for the IPO market. The Wall Street Journal reported that, despite the U.S. being home to almost 100 “unicorns” (privately financed companies with a valuation north of $1 billion), many have opted to remain private in order to avoid the cumbersome and costly public markets that some argue create unreasonable short-term expectations. It is important to note that this is just one potential explanation for the number of public companies in the U.S. declining from nearly 8,000 in 1997 to fewer than 4,000 today, The Wall Street Journal reports.
If a proposal for semi-annual reporting were to gain traction in the U.S., companies would nevertheless face the continued challenge of keeping investors consistently up-to-date on their business strategy, plans and performance. Management wouldn’t be “off the hook” if less frequent reporting were required. But companies could communicate with the investment community more on their own terms.
With less frequent reporting, we see a few imperatives:
Introduce a long-term operating framework.
If the purpose of changing the quarterly reporting process to semi-annually is to allow management to focus on the long term, then it should be expected that companies would better educate the investment community on what the future holds. This would include communicating a high-level vision of the industry and the company’s role in it. Further, the Street would expect to understand how management plans – over the medium and long term – to leverage its balance sheet and capital allocation priorities to achieve operating objectives, while committing to returning excess cash to shareholders.
Go deeper on disclosure.
In exchange for less frequent updates, Wall Street would expect greater financial disclosure during the semi-annual reporting period. Companies would need to rethink what content they offer to educate the investment community and present a narrative that creates excitement about the future yet provides clarity on performance. Examples of expanded disclosure could include providing key operational and other metrics related to specific geographies, products, etc., and adding a broader bench of executives on the earnings call to provide more context on individual business segments and initiatives. Companies would also need to be vigilant in assessing materiality to update the market appropriately between reporting periods.
Engage the Street with greater frequency.
The pressure would be on senior management to drive its own narrative between earning periods. Investor and analyst engagement through non-deal roadshows, conferences, and company-sponsored events would be more critical and carry greater weight.
Increase employee communications.
In the absence of quarterly updates, the company would need to increase internal engagement to ensure employees understand the strategic direction of the business, how the company is delivering on its objectives, and what these mean for them. In practice, this could be conducting more frequent town halls, creating more in-depth content to educate employees about performance, such as videos, CEO emails or blog posts from management, or explanatory creative content for internal digital channels.
Promote progress through financial media relations.
Earnings announcements are a natural news driver that can generate engagement with financial and business publications. With fewer touchpoints throughout the year, a company would need to find ways to engage media in the interim to keep reporters up to speed on how strategies and priorities are evolving to meet business objectives and realities.
Whether or not you support less frequent reporting, it is imperative that business leaders, regulators, and the investment community continue to discuss these issues and tackle the broader challenge of improving the transparency and trustworthiness of our public financial markets. The concept of the public company—the Dutch East India Company launched the first-ever IPO over 400 years ago—is arguably the greatest invention in the history of capitalism. Fast forward to 2018, and we must strive to continue the evolution of our markets so that they are well-positioned to create value for investors and operate for the next 400 years and beyond.
Allison Metcalf is a vice president, Financial Communications & Capital Markets, Los Angeles.
Ted McHugh is an executive vice president, Financial Communications & Capital Markets, New York.