You might have heard that President Donald Trump disclosed Friday that he's asked the U.S. Securities and Exchange Commission to study the idea of allowing public companies to report earnings on a semiannual basis rather than a quarterly one. With all due respect to Jim Cramer (who likes the concept), I think that's a very bad idea.
Now, there are two arguments for providing less information to shareholders. The first is that the current system forces executives to focus too much on making their quarterly numbers. Critics say that this "short-termism" comes at the expense of focusing on longer-term growth. The second argument is that quarterly reporting takes time and resources that companies could better use elsewhere.
But here's my take:
I'm Not Worried About 'Short-Termism'
The idea that short-term thinking drives corporate executives too much these days assumes that the market is incapable of figuring this out, and instead punishes long-term planning. That's simply is not true. After all, the market is a discounting mechanism, and any short-term price swings with a good stock merely benefit to those who have longer-term horizons.
Yes, we sometimes see short-term volatility when stocks sell off due to short-term revenue-timing issues -- but that just creates buying opportunities for smart investors who see good companies' long-term value. If the CEO fears a negative response to short-term results, then maybe the CEO is just a poor communicator who's failing to explain the short-term sacrifices needed to reach the company's longer-term goals.
Allowing such CEOs to escape short-term scrutiny doesn't make for better companies (or for better long-term results). Instead, it simply allows weak CEOs to escape exposure. CEOs aren't hamstrung by short-term reporting unless they want to be.
Switching to less earnings transparency would also benefit well-connected investors and large institutional players, to the detriment of smaller shareholders. After all, whom do you think is going to get the inside information that's no longer communicated quarterly?
The little guy will have an even harder time competing when the information flow gets disrupted in that manner.
I'm Not Buying the Cost Savings
The second argument pertaining to the cost of quarterly reporting seems equally weak to me.
Frankly, I expect every public company to continue to internally prepare quarterly reports no matter what the SEC requires. Such reports aren't audited, so the cost of supplying them to the public seems minimal.
The Bottom Line
As far as I'm concerned, less reporting means less transparency. And less transparency makes for poorer investment decisions in both the short and long terms.