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Monday, November 5, 2018

Strategic CSR - Earnings

It is not often that I find myself agreeing with a policy of the current administration (or, perhaps, politicians in general), but I found the announcement in the article in the url below interesting:
"President Donald Trump brought a long-simmering debate on Wall Street to the surface Friday when he prodded regulators to look into scaling back how often publicly traded companies report financial results."
Needless to say, the proposal was brought forward in a carefully considered, detailed policy document that explored the pros and cons of such a complex decision. ... I'm kidding, it was announced in less than 280 characters via Twitter:
"Trump's proposal -- released via Twitter and prompted, he said, by a recent conversation he had with PepsiCo Inc. Chief Executive Officer Indra Nooyi -- would do away with quarterly reports and move to a semi-annual system."
I am sure our motives are different, but I'll take whatever I can get. While I generally support increased (not decreased) transparency and think it is important to focus on earnings guidance rather than actual results, this instinct is conflicted with the desire to push executives to see past the interests of shareholders to operating the firm in the interests of its broader set of stakeholders. As such, any regulatory step that can lessen the knee jerk reaction of executives to operate in the interests primarily of shareholders is a step in the right direction. That is perhaps why shareholder advocates dislike it so much:
"To its detractors, it is, in the words of Hilton Capital Management's Dick Bove, 'a horrible idea.' It would be a 'major move to provide less information' at a time when investors' access to information has 'already been dramatically reduced,' Bove said."
But, as the title of the article suggests, the stimulation revitalized a long-standing debate about the benefits of such a move. Indra Nooyi sees it more as a way to harmonize European and U.S. reporting requirements:
Europe has backed away from requiring companies to file quarterly reports. The most recent data from the U.K. shows that only 57 of the companies in the benchmark FTSE 100 index were still issuing quarterly reports as of September 2017, according to the Investment Association. Japan, though, moved in the opposite direction, gradually forcing companies to shift from semi-annual to quarterly reporting during the 2000s."
Volatility is another reason advanced against this idea but, more likely, is that the market would adjust once the dust had settled:
"Investor reaction to the idea was mixed. Some said the change could help companies to invest more in their businesses rather than race to show profit gains each quarter. Others said that the prospect of fewer financial reports could exacerbate price swings around earnings or fuel insider trading."
Another good argument against is that longer gaps between material information would encourage insider trading:
"The reduction in transparency could encourage insider trading, said Robert Pozen, senior lecturer at MIT Sloan School of Management and former vice chairman of Fidelity Investments. 'You have such a long dark period where there is no information going out to the public,' Pozen said. 'You're dramatically increasing the temptation for people to trade' on inside information, he said."
The good news is that Congress would not need to pass legislation for this to happen – the SEC could change its regulations if it wants. Another thought is that, given the rise of social media and CEOs' apparent willingness to share valuable information this way, quarterly reports are becoming less and less important:
"The agency could make such a change without Congress passing legislation but that doesn't mean it will, said David Martin, an attorney who previously ran the agency unit that oversees corporate filings. But critics contend that new reporting requirements may not spur meaningful change given the deluge of company information available on social media."
Take care
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Trump Ignites Wall Street Debate With His Tweet on Earnings
By Justin Sink, Annie Massa & Benjamin Bain
August 17, 2018
Bloomberg Businessweek