A bad idea made the rounds on Friday and it emanated from the source of all bad ideas: Donald Trump’s Twitter feed.
“In speaking with some of the world’s top business leaders I asked what it is that would make business (jobs) even better in the U.S.”, Trump tweeted at 7:30 in the morning, describing a series of discussions he apparently held with corporate visionaries. The President went on to quote one of these “top business leaders” as follows:
Stop quarterly reporting & go to a six month system.
That, Trump explained, “would allow greater flexibility & save money.”
Being the flexible penny pincher he is, Trump immediately “asked the SEC to study!” (inexplicable exclamation point in the original).
Frankly, I wasn’t planning on writing about this. Most of the headlines I read on Friday referencing that tweet contained the phrase “Trump proposes” or some derivation thereof, and what’s important to remember here is that Trump “proposes” a lot of things. For instance, he “proposed” constructing a 100-foot high concrete wall on the border with Mexico. And he “proposed” invading Venezuela. And he “proposed” building an army of intergalactic marines called “Space Force.” So it’s not clear that anyone needs to take this seriously.
But Trump is hardly alone in suggesting that this is a good idea. Larry Fink, Jamie Dimon and Warren Buffett (to name a few) have raised the issue in one way or another and as it turns out, it was Indra Nooyi (the outgoing CEO of Pepsi) who inspired Trump’s Friday tweet. Here’s her statement on the subject:
[Many companies] have been discussing how to better orient corporations to have a more long-term view. My comments were made in that broader context, and included a suggestion to explore the harmonization of the European system and the U.S. system of financial reporting.
“I’m encouraged to hear people from both sides of the aisle talking about the need to promote corporate behavior that’s more focused on the long-term, though the precise policies for getting there need to be thoughtfully examined and debated,” Fink said in his own statement Friday.
Here’s the thing: this is a terrible idea and I think everyone intuitively knows it.
The problem here isn’t quarterly earnings reports which, by virtue of being numbers on a piece of paper and thus inanimate, cannot possibly have a sense of purpose and therefore shouldn’t be implicitly characterized as conspiring against the long-term viability of corporate America.
The problem, rather, lies with corporate management teams and investors, with the latter’s myopia encouraging and facilitating commensurate short-sightedness from the former. The solution to that problem is obviously not less transparency.
Think about it this way. If semi-annual health checkups were prompting you to have panic attacks to the detriment of your long-term well being, the solution wouldn’t be to do away with the checkups, the solution would be to address the panic attacks.
It’s the same thing here. Investors need to recondition themselves to understanding share ownership for what it is: a decision to hitch your financial wagon to the assumed long-term prosperity of a given business.
And corporate management teams need to recondition themselves to understanding their role for what it is: a privileged position that entails perpetuating the long-term viability and prosperity of a given business.
Contending that the only way to accomplish that dual reconditioning is to do away with quarterly earnings reports at the expense of transparency is to simply throw in the towel on the idea that investors are capable of understanding what it means to be shareholders and giving up on the idea that corporate management is capable of taking a long-term view of a business.
Not to put too fine a point on it, but shareholders who don’t understand what it means to be shareholders don’t need to own any shares and management teams who don’t understand what it means to be in management don’t need to be running companies.
Normative issues aside, doing away with quarterly earnings will invariably lead to all manner of bad outcomes including, but certainly not limited to, less balance sheet discipline, insider trading and extreme volatility around semi-annual reporting season.
That is so painfully obvious that it boggles the mind how anyone wouldn’t understand it. The longer the time frame between public filings, the more inclined management will be to resort to shenanigans because the assumption will be that they’ve got more time to clean things up before anyone has to know about it.
Additionally, this won’t do anything at all to discourage myopia on the part of investors or on the part of management. If anything, investors will be even more skittish than they were before because they’ll be in the dark for six months at a time as opposed to three months. That means any little piece of incremental news that happens to leak out will be floating around in the market with no context, depending on how close we are to the next semi-annual report (after all, quarterly reports are the context).
As far as management goes, if you can’t even trust them to have the discipline to ignore earnings-related gyrations in their stock, what in the world makes you think it’s a good idea to give them six months worth of rope between reports?
Oh, and finally, it is ridiculous to assume that an extra three months is going to somehow cure management’s myopic tendencies. “The argument that semi-annual reporting would encourage management to think more about the ‘long-term’ is ridiculous – unless six months has become the new five years”, Carson Block wrote after Trump’s tweet.
Perhaps the most amusing thing about this on Friday was the fact that some of the very same pundits who spent all week decrying Tesla for a lack of transparency were out on Friday suggesting that Trump’s idea is a good one. That’s a bit contradictory, wouldn’t you say? Or maybe Elon Musk is the only executive who needs to be transparent?
I’m going to give the last word on this to Herb Greenberg who I don’t quote as often as I should, given that I have a lot of respect for him:
Abolishing quarterly reporting is a ridiculous idea. It leads to less transparency. It’s one thing to stop playing the quarterly meet/beat game; it’s another to give investors less to work with. I’m biting my tongue to avoid saying more.