In December 2018, the SEC posted a "request for comment soliciting input on the nature, content, and timing of earnings releases and quarterly reports made by reporting companies." According to the press release, the request for comment solicits "public input on how the Commission can reduce burdens on reporting companies associated with quarterly reporting while maintaining, and in some cases enhancing, disclosure effectiveness and investor protections. In addition, the Commission is seeking comment on how the existing periodic reporting system, earnings releases, and earnings guidance, alone or in combination with other factors, may foster an overly short-term focus by managers and other market participants." (See this PubCo post.) At the end of March, the influential Council of Institutional Investors submitted its comments in response to the SEC request.

In its comment letter, CII defends the current quarterly reporting system, viewing quarterly reporting as a "key element of the timely and accurate information flow that underpins the quality and efficiency of our capital markets. The requirement helps ensure that important information is promptly and transparently provided to the marketplace, allowing investors to assess concrete progress against strategic goals." More specifically, CII contends that the requirements of quarterly reporting "foster discipline and accountability," including the independent auditor review, management certifications, "filed" (as opposed to "furnished") status and XBRL data tagging. For example, with regard to auditor review, CII maintains that the review increases public confidence in the financial information because it is believed to "increase the quality, usefulness and reliability" of the financial statements.

With regard to a potential shift to semi-annual reporting, CII believes that "less frequent reporting would likely lead to greater share price volatility, and more intense investor focus on short-term share price fluctuations, as investors expend more effort guessing how the company is doing." In support of that contention, CII cites an academic study showing that 'a reduced frequency of reporting may lead investors to overreact to alternative sources of information for non-reporting periods."

Nor does CII believe that quarterly reporting contributes to short-termism: the "notion that quarterly reporting encourages short-term thinking is in our view outdated and generally not supported by empirical evidence." Rather, CII contends, less frequent reporting "will lead to greater stock price volatility, as investors do more guess-work on what is happening at a company, increasing the potential for short-term profits and thereby intensifying short-termism. Less timely information and greater stock price volatility also would invite more insider trading, which CII believes undermines confidence in the market." Moreover, CII argues, "the view that three months is 'short-term,' but six months is 'long-term,' seems highly questionable at best."

SideBar

Of course, others certainly have a different perspective on quarterly reporting. In this article on CNN.com, an NYU professor argues that, while the transparency of quarterly reporting "seems like a good thing," as it turns out,

"quarterly reporting has evolved into a system of managing primarily for the quarterly numbers, with a net result of distorting financial performance negatively, much in the way teaching students solely to perform well on a standardized test distorts their learning. The focus on quarterly results has brought us unprecedented share buybacks which artificially boost stock prices, non-strategic cost-cutting, less investment in longer-term basic and applied research (versus product development), as well as an unhealthy pressure on labor costs. Additionally, a study published in The Journal of Accounting and Economics found that 78% of CFOs would sacrifice long-term value to make their quarterly earnings targets. The study found they would cut spending, delay starting a beneficial project, or book revenues ahead of time just to meet short-term earnings expectations."

But would a change to semiannual reporting have much effect on short-termism? That is, wouldn't the same 78% of CFOs who would sacrifice long-term value to make their quarterly earnings targets also make the same sacrifice to achieve their semiannual earnings targets? As one investment strategist quoted in this Reuters article characterized the concept, it's a "cockamamie idea. For starters, what's the difference between six and three months? ... Either way we're talking about a very short-term period." (See this PubCo post.)

In addition, CII recommends that the SEC address the timing of quarterly reports and earnings releases, advocating that quarterly reports be issued before earnings releases and earnings calls to allow investors "time to review GAAP financials before being inundated with non-GAAP information." Alternatively, CII would support concurrent release in a comprehensive package.

To encourage long-term thinking, CII argues, rather than decreasing the frequency of periodic reporting, the SEC should instead focus on discouraging quarterly forecasted earnings guidance, which CII believes is a "much more significant contributor" to short-termism. Earnings guidance, is, "by definition" "predictive and speculative," and "can have negative effects on investors, companies and capital markets." First, CII suggests that the SEC require all earnings guidance to be "furnished" to the SEC. More significantly, because CII advocates that companies focus on long-term growth and sustainability, it generally supports the decision to decline to provide quarterly earnings guidance altogether. Again, CII believes that "guidance can cause undue focus on short-term profits at the expense of long-term strategy and investment. More specifically, we believe quarterly earnings guidance can incentivize companies to unduly focus on 'making the numbers' at the expense of the long-term interests of the company and its long-term shareowners."

SideBar

That position has been echoed by a number of others. In this WSJ op-ed, investor Warren Buffett and JPMorgan CEO Jamie Dimon advocated a move away from quarterly guidance, but reaffirming their support for quarterly reporting. (See this PubCo post.) In addition, a group of prominent CEOs of major public companies and institutional investors developed a list of "commonsense corporate governance principles," designed to generate a constructive dialogue about corporate governance at public companies. With regard to earnings guidance, the group maintained that a "company should not feel obligated to provide earnings guidance–and should determine whether providing earnings guidance for the company's shareholders does more harm than good. If a company does provide earnings guidance, the company should be realistic and avoid inflated projections. Making short-term decisions to beat guidance (or any performance benchmark) is likely to be value destructive in the long run." It's worth noting here that many smaller companies feel compelled to provide earnings guidance or risk loss of analyst coverage. With regard to quarterly reporting, the view of the group was that companies "should frame their required quarterly reporting in the broader context of their articulated strategy and provide an outlook, as appropriate, for trends and metrics that reflect progress (or not) on long-term goals." (See this PubCo post.)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.