August 17, 2018 at 10:10 AM
President Trump called on financial regulators Friday to consider allowing public companies to share information with investors less often, a potentially major shake-up of how corporate America operates.
“That would allow greater flexibility & save money,” Trump said in a tweet.
The proposal would mean rethinking a cornerstone of the country’s accounting system since the Great Depression: Every three months, publicly traded companies must offer a detailed financial picture — including their revenue and profits — to shareholders. Many corporate executives have complained for years that such requirements are a time-consuming, costly distraction that leads them to focus on short-term profits rather than the long-term health of their companies.
The Securities and Exchange Commission should study moving the reporting requirement to every six months instead of every three, Trump said.
“We are not thinking far enough out. We’ve been accused of that for a long time, this country. So we’re looking at that very, very seriously,” Trump said as he was boarding Marine One on the White House lawn Friday morning. “We’re looking at twice a year instead of four times a year.”
Trump said the idea came from conversations with the “world’s top executives,” including PepsiCo’s outgoing chief executive, Indra Nooyi. "I asked, ‘What could we do to make it even better?’ And she said, ‘Two-time-a-year reporting, not quarterly.’ "
In a statement Friday, Nooyi said her comments were part of a broader conversation about how to better focus companies toward long-term goals. “Most agree that a short-term-only view can inhibit long-term strategy and, thus, long-term investment and value creation,” she said.
Tesla chief executive Elon Musk also cited the issue when explaining why he has launched a surprise effort to take the $50 billion auto company private. Being a public company subjects Tesla “to wild swings in our stock price” and makes it a target of investors betting the company’s stock price will fall, he wrote in an email to employees last week.
It “also subjects us to the quarterly earnings cycle that puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term,” Musk said.
In a statement, SEC Chairman Jay Clayton said that Trump had highlighted “a key consideration for American companies" and that the agency is already reviewing public disclosure requirements, including their “frequency.” “Many investors and market participants share this perspective on the importance of long-term investing,” he said.
The idea comes as Sen. Elizabeth Warren (D-Mass.) has proposed a more sweeping restructuring of corporate behavior, including requiring companies with more than $1 billion in annual revenue to weigh the interests of all stakeholders — including workers and local communities, in addition to shareholders — in their decision-making. Under the proposal, workers would elect 40 percent of the directors, and three-fourths of directors and shareholders would need to sign off on political expenditures.
Trump’s proposal, offered in a 7:30 a.m. tweet, took the securities industry by surprise and prompted some to worry that it could unintentionally lead to more market volatility and corporate mischief. Some high-profile executives, including JPMorgan Chase chief executive Jamie Dimon, have recommended that companies stop providing Wall Street analysts guidance on what to expect from quarterly profits, for example.
But Trump’s proposal goes much further, worrying shareholder advocates who have been calling on corporations to disclose more information, not less. Less-frequent public disclosures could hand another advantage to sophisticated investors with easy access to corporate executives, corporate governance experts said.
“Investors need timely, accurate financial information to make informed investment decisions,” Amy Borrus, deputy director of the Council of Institutional Investors, said in a statement.
The quarterly reports provide important insight into a company’s potential trouble spots, and force its executives to address shareholders’ concerns while enforcing corporate discipline, corporate governance experts say.
Trump “was a CEO, and managers are never wild about the constant reporting. It’s a lot of work to report every three months,” said Charles M. Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware.
If a company struggles to meet quarterly profit expectations or executives feel pressured to manipulate results to reach Wall Street expectations, that reflects poor management and communication, Elson said.
“It is not the fact that you report quarterly that is the problem; it’s a bad management team,” he said. “Changing the reporting period is not going to change that.”
Eliminating the quarterly reporting requirements could also lead investors to fill the information vacuum by relying more heavily on rumors and off-the-cuff remarks made by company executives, corporate governance experts say.
“They are more likely to react to other types of information and more likely to overreact,” said Jill E. Fisch, a co-director of the Institute for Law and Economics at the University of Pennsylvania. It “is likely to lead to more speculation and price volatility."