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US quarterly earnings requirement up for debate
NEW YORK, Dec 21, 2018 (BSS/AFP) – Quarterly earnings season is entrenched
in the US business world, offering a window into profits and losses every
three months, but critics believe the requirement to lay bare corporate souls
four times a year may focus too much on the short-term.
US President Donald Trump, citing input from business leaders, in August
asked the US Securities and Exchange Commission to study a possible switch to
reporting every six months.
The agency followed up this week, seeking public comment on the current
system, with an eye towards reducing “burdens” on companies.
“Our markets thirst for high-quality, timely information,” SEC Chairman
Jay Clayton said in a news release. “We recognize the importance of this
information to well-functioning and fair capital markets.
“We also recognize the need for companies and investors to plan for the
long term. Our rules should reflect these realities.”
Under the current system, earnings season lasts roughly one month and
kicks off about two weeks after the end of the quarter. Reports are released
outside of market hours, giving investors, analysts and journalists a chance
to assess profits, sales and spending against expectations.
Companies carefully calibrate and craft messaging about their performance,
in press releases and conference calls. An unexpected comment on the
company’s prospects or the broader economic outlook can send shares skidding.
Even more violent reactions can follow from bigger shocks, as when
Symantec plunged 33 percent in May after announcing an internal investigation
and shutting down the conference call without taking question.
Tesla Motors was punished after Chief Executive Elon Musk in May cut off
analysts who asked “boring, bonehead questions” about finances in May. Musk
cited excessive reporting requirements earlier this year when he floated the
idea of taking the electric car maker private.
While many market watchers applaud the idea of encouraging longer-term
thinking, some are not convinced investors are prepared to accept fewer
earnings updates.
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– Recipe for scandal? –
“Investors will always want more information rather than less,” said
Frances Donald, head of macroeconomic strategy at Manulife Asset Management.
But Tensie Whelan, director of the NYU Stern Center for Sustainable
Business said the desire “to hold the managers accountable, on a quarterly
basis has a downside.
The “reality of the quarterly reporting is that it drives bad decision
making.”
In many cases, executive compensation is tied to beating Wall Street
expectations, a dynamic that can lead companies to cut needed investment or
undertake programs that look great in the short-term but do not succeed in
reality.
“If you look at the scandals, at Wells Fargo, at Volkswagen, underneath
they were trying to make their quarterly numbers in unrealistic ways and they
were being pressured to do so by analyst expectations,” Whelan said.
Stephen Terry, an economist at Boston University, said companies that meet
or exceed analyst expectations have done so in part by cutting spending on
research and development.
He estimated a 0.1 percent annual hit to growth in a study titled “The
Macro Impact of Short-Termism.”
But Terry has not taken a position on quarterly reports, telling AFP in an
email that “short-term targets provide useful discipline on executives and
transmit important information to capital markets.”
Some alternatives to the current system have already been floated.
JPMorgan Chase Chief Executive Jamie Dimon and billionaire Warren Buffett
earlier this year proposed that companies stop providing quarterly earnings
forecasts, arguing that the projections can encourage short-term thinking.
Whelan has suggested companies could disclose long-term objectives and
targets with their press releases.
One challenge is meeting the demand of different investors, with some
shareholders clamoring for more disclosure on environmental and social
issues, Whelan said.
At the same time, another group of shareholders, Wall Street activists,
are pushing hard for spending cuts, layoffs, share buybacks and other
measures to boost share prices.
The SEC will collect comments for 90 days on “the nature, content, and
timing of earnings releases and quarterly reports” to study alternatives to
the current requirement.
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