This morning President Trump directed the Security and Exchange Commission to explore extending financial reporting deadlines from three months to six. In a morning tweet, he said this suggestion came from top business leaders who told him that this “would allow greater flexibility & save money.” Indeed. But at a time when public confidence in all institutions, including business, is declining, this is exactly the wrong direction for government to go.
Though quarterly reporting may reinforce the short-term mentality of many on Wall Street, an approach that leads companies to maximize near-term profit at the expense of long-term value, simply extending reporting from three to six months won’t change this orientation. Just last month, Jamie Dimon and Warren Buffett called for the end of quarterly earnings forecasts, but stressed that this “should not be misconstrued as opposition to quarterly and annual reporting.” The pair emphasized that “[tr]ansparency about financial and operating results is an essential aspect of U.S. public markets.” Similarly, FCLTGlobal, a non-profit that began as a joint initiative of BlackRock, McKinsey, the Canadian Pension Plan Investment Fund and others to encourage more long-term thinking in finance, stated in a reportlast year that “[q]uarterly earnings remains essential in providing investors with the transparency they need and in keeping management teams accountable for their performance.” The group suggested that instead of reducing reporting requirements, companies should be encouraged to incorporate long-term goals in their public reporting and to discuss the progress they are making toward these goals each quarter.
What the president’s proposal will do is reduce transparency and deny investors, government regulators and the public essential information about a range of topics that are in the public’s interest to know. These quarterly reports, called 10-Q filings, are divided into two parts. The first part includes financial statements, disclosures about market risks, analysis of the company’s financial situation by management and discussion of its internal controls. These disclosures give individual and institutional investors the information they need to make informed investment decisions.
The second part of these quarterly reports covers a range of other topics that help investors and the public identify potential risks such as whether there are legal proceedings pending against the company, default proceedings or the unregistered sales of equity securities. Not surprisingly this is information that company leaders often are not eager to disclose, but under the law, they must. This is a good thing because it provides an important source of accountability.
Since World War II the American economy has flourished and continues to lead the world. At a time when corruption is rife and financial instability is the order of the day in many countries, the American economy continues to be the foundation upon which the global system is anchored. Part of its success has been American ingenuity and innovation. But an equally important aspect has been the relative stability of democratic governance and the integrity of the U.S. judicial system, which serves as an arbiter of commercial disputes. A key feature of this rule of law system is vigorous government regulation and oversight of U.S. financial markets. Global investors take comfort from the overall integrity of this regulatory system, with the SEC at its epicenter. And what gives the SEC the tools it needs is the legal requirement that compels every publically traded company to make these quarterly public reports.