Should Companies Continue to File Quarterly Reports?
The President of the United States recently tweeted a desire to enact a policy change regarding the reporting done by publicly-traded companies, switching from filing information reports four times a year to twice yearly. Is this a good idea?
This degree of transparency is unprecedented in most global markets and was part of the reforms put into place when the SEC was launched after the market turmoil of 1929 and subsequent years. The Securities Act of 1933 and the Securities Exchange Act of 1934 helped shape what we now know as standard operating procedures for providing documents and information about a publicly-held company’s financial condition.
The case for changing from quarterly to bi-annual reports largely rests with the administrative burden that companies face in complying with the current filing requirements. Teams of accountants and staff members spend untold thousands of hours and dollars compiling, verifying, auditing, and disseminating these quarterly reports, resources, management argues, that could be better spent on improving growth, margin expansion, debt reduction, or other corporate needs.
Executives also bemoan the quarterly media frenzy that surrounds quarterly reporting. Management often must direct resources towards meeting short-term quarterly goals, lest their stock price get hammered.
Often this focus on near-term performance takes away resources that could have been used to help the company drive towards its longer-term objectives. As long-term investors ourselves, we see the benefit of focusing on the long-term and appreciate managers who share this perspective. Rare is the individual investor who hasn’t seen his or her portfolio take a hit during earnings season when a company posted solid results that were nonetheless received poorly by the market, with the result that the share price slid down a few dollars in price.
The key reason that public companies must file quarterly is to maintain the transparency of the markets. By providing regular reports on its operations, companies keep the public informed about key developments. While fraud can never be entirely eliminated, it becomes harder to enact when a business is under careful scrutiny of the public.
Outside the U.S., publicly-held companies are more commonly held to a twice-yearly reporting schedule. The U.K. ceased requiring quarterly reports in 2014 in favor of semi-annual reports, but 90% of companies still report quarterly, largely to suit American markets. Most other international markets use a semi-annual filing schedule, though it might be hard for POTUS to swallow the thought that countries in Europe are doing things “better” than here in the States.
Still, for investors used to hearing from companies four times a year, changing to a six-month reporting scheme would seem to introduce long periods of silence and uncertainty. Employees of companies would also see their chance to sell shares of stock reduced (since many public companies restrict these sales to periods immediately following earnings releases in order to prevent front-running by those with insider knowledge).
My modest proposal—though it is admitted not likely to be enacted—is to change to require reporting three times a year instead of quarterly. Filing every four months, triannually, would eliminate a filing cycle for companies, saving money and resources, while preserving a high degree of transparency for shareholders and regulators.
Yes, there would still be a mandate for companies to focus for companies on shorter-term performance in order to meet market expectations, but this compromise keeps the checks and balances of the current system in place while making some concessions to management to help with their resource allocation issues.
- DOUG GERLACH