The SEC has just announced that the planned Corp Fin roundtable on short-termism will be held on July 18, 2019. In originally announcing the roundtable in May, SEC Chair Jay Clayton observed that the needs of “Main Street investors” have changed; they now have a longer life expectancy, and, in light of the shift from the security of company pensions to 401(k)s and IRAs, they now have greater responsibility for their own retirements. As a result, “Main Street investors are more than ever focused on long-term results.” However, from time to time, they also “need liquidity. In other words, at some point, long-term investors do become sellers. The SEC’s disclosure rules should reflect and foster these needs—long-term perspective and liquidity when needed.” To that end, the goal of the roundtable is not just to discuss the problems associated with short-termism, but also to promote “further dialogue on the causes of and potential solutions to the issue.”
Much has been written about the problems associated with the prevalence of short-term thinking in corporate America. As noted in a post from The Harvard Law School Forum on Corporate Governance and Financial Regulation, an academic study revealed that “three quarters of senior American corporate officials would not make an investment that would benefit a company over the long run if it would derail even one quarterly earnings report.” (See this PubCo post and this article in The Atlantic.) There are, of course, many points of view with regard to the causes of short-termism, with blame attributed to, among other things, executive compensation (see this PubCo post and this PubCo post), pressure from Wall Street to increase quarterly results (see this PubCo post), traders’ compensation (see The Atlantic), the “legal underpinnings” of capital markets regulation and the business model and prevailing culture of the investment management industry (see this PubCo post), caselaw regarding directors’ fiduciary duties (see this PubCo post), and, perhaps most significant, hedge-fund activism (see this PubCo post)
There will be two panels. The first “will explore the causes and impact of a short-term focus on our capital markets, and seek to identify potential market practices and regulatory changes that could encourage long-term thinking and investment.” The second “will focus on our periodic reporting system and discuss what specific regulatory changes to that system could be implemented to foster a longer-term focus in our periodic reporting system.”
Back in May, Clayton suggested the following as potential topics:
- “The role, if any, that short-termism plays in the declining number of public companies. In particular, examining how the pressure on public companies to take a short-term focus in our markets may discourage private companies from going public could provide valuable insight into how to make our public markets more attractive and increase investment options for Main Street investors.
- “Our ability to reduce burdens for companies while facilitating better disclosure for long-term Main Street investors. For example, I am interested in exploring whether the information typically included by companies in earnings releases could be allowed to satisfy certain quarterly reporting obligations and whether there are ways that quarterly disclosures could be streamlined. This is particularly the case in the first fiscal quarter when the quarterly report often comes closely on the heels of the annual report.
- “The potential for certain categories of reporting companies, such as smaller reporting companies, to be given flexibility to determine the frequency of their periodic reporting.
- “Market practices that could be oriented to encourage longer-term thinking and investment at public companies. For example, it would be informative to explore the extent to which certain activist practices, such as “empty voting” (e.g., acquiring voting rights over shares but having little or no economic interest in the shares), are factors that drive short-term focus.”
For a discussion of the “request for comment soliciting input on the nature, content, and timing of earnings releases and quarterly reports made by reporting companies” that the SEC posted in December 2018, see this PubCo post. In particular, as Clayton noted in his statement, the request highlighted questions regarding “mandated quarterly reporting and the prevalence of optional quarterly guidance. The request also asked for comments on whether and how our reporting system may be causing companies to disproportionally focus their time and resources on short-term results. For a discussion of whether a shift to semiannual reporting would really affect short-termism, see this PubCo post.