TRUMP & TRANSPARENCY: PUBLIC COMPANIES SHOULD NOT DO AWAY WITH QUARTERLY EARNINGS
Originally Posted August 21st, 2018: https://woodworthfund.blogspot.com/2018/08/trump-transparency-public-companies.html (Some links below may be broken)
On Friday morning, President Trump tweeted advice from "top business leaders" who advised to "stop quarterly reporting & go to a six month system.
Long term thinking is important, but removal of transparency and public information for public companies only hurts investors.
There are other factors that may be of more concern for fears short-termism, such as CEO compensation.
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
In an early Friday morning tweet, President Trump took up advice from business leaders to look into removing required quarterly earnings reporting by public companies to the US Securities & Exchange Commission, in favor of a 6-month reporting timeline - similar to reporting done in European markets. This suggestion comes from Indra Nooyi, Pepsico Chairman and CEO, with claims of boosting business growth and calming volatility in the markets. We disagree - removing quarterly reporting only removes transparency and hurts investors.
I have promoted this idea for a decade and talked about a lot lately on TV - the reaction and pressures from quarterly reporting have unnecessarily wrecked the market and derailed business plans. https://t.co/LGPqMusDka— Charles V Payne (@cvpayne) August 17, 2018
Many have made claims that quarterly earnings reporting causes undue volatility and short-termism. The bottom line here is that more transparency will always be a good thing - it promotes change and holds public companies accountable. I would contend that in seeking to reform short-termism, policymakers should look closer at stock price-based CEO compensation structures, which encourage leaders of public companies to inflate the share price by any means, even if this only results in a short-term bump.
Take for example the volatility argument, which claims that quarterly earnings tend to make share prices much more speculative leading up to the earnings date and resulting reactions. Let’s assume the share price of XYZ stock in is up 4 cents for the quarterly report in anticipation. On a 6-month reporting, it may very well be up 8 cents proportionally with pent up speculation. In the absence of company goals, Wall Street may inevitably be pressured to set the goals regardless, leading to volatility over the unknown for 6 months, rather than the usual 3. This situation puts professional traders at a substantial advantage over retailer investors, having better and easier access to what would make the market move - pure speculation rather than accountable reporting from the company.
Spoiler alert: If companies were to go to semi-annual reporting from quarterly, we market participants would find new variables/signals/indications to over-focus on and over-react to.— Dow (@mark_dow) August 17, 2018
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.— Herb Greenberg (@herbgreenberg) August 17, 2018
Career-investor Warren Buffett and JP Morgan Chase CEO Jamie Dimon both brought this argument to light earlier in 2018, claiming that this kind of reporting would only encourage companies to make decisions that hurt their long-term sustainability and growth, while boosting the short term through decisions such as delaying investments.
President Trump has raved about the US Economy under his leadership. Though the exact effects such a move would have on the markets is unclear, the move would be likely to both anger and hurt investors if it were successful. It is a tried truism that the market functions more efficiently with more transparency, not less.
In the words of CNBC’s Bob Pisani on Trump’s tweet, “Who wins when there is less information out there?” Would the SEC, an agency ostensibly setup to help protect investors, endorse this? Probably not, but the Trump administration has proven both determined and unconventional over the past two years.
About the Author: Quinn Millegan with his brother, Drew Millegan, (20 and 23 years old respectively) manage the Woodworth Contrarian Stock & Bond Fund, a hedge fund based in McMinnville, Oregon. They grew up in the finance world, and specialize in contrarian investment strategies in the US Public and Private markets.
Feel free to contact us at our office during the week between 6:30 AM and 2:30 pm PST at 1-800-651-1996.
Originally Posted on LinkedIn: https://www.linkedin.com/pulse/trump-transparency-public-companies-should-do-away-quinn-millegan/
