Should the government keep making banks and other public companies report financial results every three months?
President Trump — the Bomb Thrower in Chief, who relishes challenging establishment practices, even ahead of actually thinking them all the way through sometimes — revived an age-old debate Friday when he tweeted that
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. “Stop quarterly reporting & go to a six month system,” said one. That would allow greater flexibility & save money. I have asked the SEC to study!
— Donald J. Trump (@realDonaldTrump)
August 17, 2018
A lot of folks will talk both sides of this issue because it is easy to recognize the expediency of such a move yet hesitate to sacrifice transparency.
On the one hand, issuing fat reports every quarter seems excessive, right? And the reports go on for weeks. Personal note: Every three months my wife and I have a conversation that goes something like this. …
“Can you pick up the kids after school on April 17?”
“No, dear, it will be earnings season. JPMorgan Chase and banking’s other titans report that day. The fate of capitalism depends on me being at my screen for 12 hours straight.”
“[CHOICE WORD]. It’s always earnings season.”
The personal biases of weary journalists aside, countless pundits and “thought leaders” have said for years — going back a few decades when we thought the long-minded Japanese were going to eat our economic lunch — that U.S. companies are crippled by short-term thinking. Quarterly reporting breeds the worst kind of managing to the metrics in the corporate suite: Forget down the road, let’s set an earnings-per-share target that we can beat by just enough, cut some costs at the last moment, generously define terms like “revenue,” practice some creative accounting, and, boom, live to tell about it for the next three months.
Sure, the Japanese economy hasn’t turned out so great, but the whole question about whether U.S. executives think far enough ahead has fresh currency as they compete with ambitious players in China and other developing markets.
Moreover, on the pro-side of President Trump’s argument, significant time and money are spent assembling voluminous quarterly reports and rehearsing for those earnings calls with analysts and reporters. It is stunning how many corporate hands vet P&L statements, balance sheets and those pesky charts and footnotes before investors and reporters get their hands on them.
Just ask Elon Musk. All that intrusion is one of the reasons he is threatening to take Tesla private.
But back to that transparency thing. The T-word was big after the financial crisis and the Enron collapse, neither of which should fade too far back in our memories. Never again, policymakers and media commentators said, should we let financial instruments and corporate financials be as opaque as they had become.
A host of new disclosures, either by companies or the government, stemmed from the Sarbanes-Oxley and Dodd-Frank acts. They include executive sign-offs on the veracity of financial statements, disclosures on pay gaps between CEOs and their underlings, the “know before you owe” mortgage disclosure rule and stress-test results about systemically important companies.
Granted, not all of those notification occur in quarterly financial statements, but they are part of the same ethos. Market bets are supposed to be made on an even playing field. Investors are supposed to know everything they need to know to make good investment decisions and for capital to be allocated efficiently. Insiders get no advantage in a fully transparent world.
Banks are a perfect example. It is very routine for banks, especially large, diversified ones, to post headline-grabbing, record profits. But a close study of the tables and footnotes and the presentations always reveals what about those is real, and what is hocus pocus. They allow us to separate the fundamentals like loan demand from distortions caused by M&A deals, tax cuts, short-term cost cuts and wider margins stemming from monetary policy changes.
Plus, the Jamie Dimons, Brian Moynihans and Michael Corbats of the world have to get on earnings calls every three months and answer questions about all these things. It’s a much tougher setting than an annual shareholder meeting or even a one-way presentation at an investor conference.
So what have bank CEOs said on the subject?
Two years ago, a group of business executives led by JPMorgan Chase’s Dimon issued a series of corporate governance recommendations called
King described short-term guidance as a "trap," saying that it "just makes no sense" because circumstance change.
But Dimon’s group stopped short of President Trump’s suggestion that financial results become less frequent. In a real-term world, it just feels a little funny to be calling for updates every six months, which is an eternity.
SEC Chairman Jay Clayton gave a diplomatic, noncommital response to the President's tweet. The agency is considering "a variety of regulatory changes" that encourage long-term captital formation while preserving investor protections, he said.
Balancing practicality and disclosure needs is hard. If this proposal were to gain momentum, some companies will surely back it, but big investors will probably fight to preserve the status quo because they want all the information they can get.
Still, maybe there is a compromise position. Keep quarterly filings but streamline them somehow — they are repetitive. Let companies forgo earnings guidance if they prefer since it is sometimes a shot in the dark anyway, and eliminate those staged events known as annual meetings, yet each year make companies hold an investor day (those are getting serious, at least in banking) and two earnings calls.
Meanwhile, the next earnings season will soon be upon us. Honey, count me out for carpool in mid-October.
Bankshot is American Banker’s column for real-time analysis of today's news.
