In December 2018, the SEC posted a “request for comment soliciting input on the nature, content, and timing of earnings releases and quarterly reports made by reporting companies.” According to the press release, the request for comment solicits “public input on how the Commission can reduce burdens on reporting companies associated with quarterly reporting while maintaining, and in some cases enhancing, disclosure effectiveness and investor protections. In addition, the Commission is seeking comment on how the existing periodic reporting system, earnings releases, and earnings guidance, alone or in combination with other factors, may foster an overly short-term focus by managers and other market participants.” (See this PubCo post.) At the end of March, the influential Council of Institutional Investors submitted its comments in response to the SEC request.
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.) Apparently, that was no joke. As reported in Forbes, for the first six months of 2018, companies in the S&P 500 spent $367 billion on stock buybacks—which can drive increases in quarterly EPS without increasing the underlying long-term economic value of the company—while capex totaled only $317 billion. ls there a way to engineer a course correction?
In this article in the WSJ and this article in the New Yorker, the authors discuss the challenges companies encounter when they try to make long-term investment decisions in the face of short-term market pressures: the debate between short-term and long-term thinking on Wall Street “is a key concern for chief executives trying to justify major capital investments that can take years to pay off. Long-range strategies can be hard to pull off in an era when Wall Street is fixated on three-month reporting periods.” Should companies try to please long-term investors or investors who are “playing the quarterly game?” What about hedge-fund activists that threaten to force the company to adopt a short-term perspective?
The Council of Institutional Investors has announced that it has filed petitions with the NYSE and Nasdaq requesting that each exchange amend its listing standards to address the issue of multi-class capital structures (i.e., share structures that have unequal voting rights for different classes of common stock). As requested by the petition, the amendment would require that, going forward, companies seeking to list with multi-class share structures include provisions in their governing documents that would sunset the unequal voting at seven years following an IPO and return the structure to “one-share, one-vote” structures, “subject to extension by additional terms of no more than seven years each, by vote of a majority of outstanding shares of each share class, voting separately, on a one-share, one-vote basis.” According to CII, unequal voting rights impair the ability of shareholders “to hold executives and directors accountable.” But companies contend that these measures are being adopted for a valid reason: to protect the company from unwanted interventions by hedge-fund activists with short-term goals and perspectives. Accordingly, the debate has centered around whether these measures are a legitimate effort to protect companies from the pressures of short-termism exerted by hedge-fund activists and others or are a mechanism that causes shareholders to cede power without providing accountability. Of course, the answer depends on where you sit.
A couple of years ago, a group of CEOs of major public companies and institutional investors, including Jamie Dimon, Warren Buffett, Larry Fink and Mary Barra, among others, developed a list of “commonsense corporate governance principles,” designed to generate a constructive dialogue about corporate governance at public companies. As discussed in a new open letter, the group believes that its principles—along with other sets of principles developed by the Investor Stewardship Group, the Business Roundtable and the World Economic Forum—have become “part of a larger dialogue about the responsibilities and need for constructive engagement of those companies, their boards and their investors.” The group views the discussion as particularly important in light of the “precipitous decline” in the number of public companies, which the group attributes, in large part, to the short-termism of public market participants. In that regard, in its letter, the group endorsed the principles developed by these other groups “as counterweights to unhealthy short-termism,” and revisited its own principles in a new updated Version 2.0. According to the press release, the signatories to Version 2.0 (including a number of well-known new signatories) have committed to apply the principles in their own businesses and call on others to join their ranks.
No sooner had SEC Chair Jay Clayton, in informal comments at a public event, called a halt to speculation that large public companies would be seeing semiannual reporting any time soon (see this PubCo post), then out comes the Fall 2018 Unified Agenda of Regulatory and Deregulatory Actions, which identifies “Earnings Releases/Quarterly Reports” as a pre-rule stage, substantive, non-significant (really?) agenda item for the SEC. The abstract indicates that Corp Fin “is considering recommending that the Commission seek public comment on ways to ease companies’ compliance burdens while maintaining appropriate levels of disclosure and investor protection.” Legal authority: “not yet determined.” Ok, does Clayton take it all back or does it still mean that, notwithstanding this agenda item, the likelihood of anything materializing as a result is—other than, as Clayton had intimated, perhaps for smaller companies—still pretty slim?
Semiannual reporting, we hardly knew ye.
You remember, of course, that in August, the president, on his way out of town for the weekend, threw out to reporters the idea of eliminating quarterly reporting and moving instead to semiannual reporting. (See this PubCo post.) The argument was that the change would not only save time and money, but would also help to deter “short-termism,” as companies would not need to manage their businesses to meet quarterly analyst expectations at the expense of longer term thinking.