The Securities and Exchange Commission Division of Corporation Finance recently hosted a roundtable to discuss short-termism in capital markets – the phenomenon where companies and investors focus on short-term results rather than having a long-term view. Unsurprisingly, opinions were varied about whether short-termism is a problem and whether it can be addressed through regulation.
Quarterly Guidance
A robust discussion took place regarding the issue of quarterly guidance. Although quarterly guidance has never been required, many companies feel compelled to issue guidance because of competitive or investor pressures. Research suggests that companies that issue quarterly guidance have shorter-term strategies designed to meet quarter-end metrics, which may have economic consequences in the long-run. Some argue that companies that issue quarterly guidance may focus less on R&D and capital expenditures than those that don't provide such guidance. According to a McKinsey Global Institute study, companies with long-term strategies create more jobs and have higher revenues than their short-term oriented counterparts. Guidance also correlates with increased stock volatility.
Although it is questionable whether the SEC has the ability to prohibit the issuance of quarterly guidance, several panelists suggested that the SEC eliminate quarterly forward-looking earnings guidance. Sarah Williamson, CEO of FCLTGlobal, a not-for-profit group that encourages long-term thinking in business and investment decision making, encouraged the SEC to issue "Staff guidance clarifying that quarterly guidance is neither required nor encouraged." Though only about a quarter of companies in the S&P 500 issue quarterly guidance, executives on the panel assumed investors expected them to provide guidance. In the past, luminaries such as Warren Buffett and Jamie Dimon have also proposed that companies stop the issuance of quarterly guidance. The SEC, however, seemed reluctant to actively encourage less voluntary disclosure but did reiterate that quarterly guidance is not mandatory.
Semi-Annual Reporting
The SEC requested comments on the issue of quarterly reporting in December 2018 after President Trump suggested the Commission "stop quarterly reporting and go to a six-month system." Though notable accounting firms defended the rigor of the quarterly reporting process in written comments, several panelists proposed a semiannual reporting system. A semi-annual reporting process would alleviate some of the costs associated with being a public company, particularly for smaller companies. Companies could use 8-Ks to report time-sensitive information and fill the transparency gap that might result from less frequent reporting. Analyses of other regimes suggest that the benefits of quarterly reporting are mixed. The European Commission briefly shifted to quarterly reporting in 2007 only to return to semi-annual reporting in 2014. Several studies at London Business School, Wharton and Georgetown University suggest that less frequent reporting may have negative consequences. Stock prices of European companies that do not issue quarterly reports tend to be more price-sensitive to major announcements than U.S. counterparts in the same industry, likely because more time elapses between the occurrence of an event and when the public is made aware of it.
The debate over whether short-termism is a fundamental problem or a reflection of robust capital markets will undoubtedly continue. Given the current political climate and the apparent reluctance of the SEC to take any formal action on this topic, it will be up to the markets to decide whether short-termism needs to be addressed.
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