According to the Securities Exchange Act of 1934, publicly traded companies are required to file quarterly earnings reports with the Securities and Exchange Commission (SEC).
This may be changing soon if President Trump gets his way. In a Friday morning tweet, Trump said that he has asked the SEC to study the possibility of dropping the quarterly reporting system, perhaps in favor of companies issuing reports every six months instead.
Trump isn't alone in his thinking. His tweet and request to the SEC stems from conversations with CEOs about ways to further boost growth. Plus, many high-profile experts have spoken out in the past against quarterly reports.
Here's why getting rid of quarterly earnings reports could be a catalyst for growth, the potential drawbacks of such a change, and whether more would need to be done to truly have the desired impact.
Why get rid of quarterly earnings reports?
The main argument against quarterly reports is that they encourage short-term thinking. In other words, CEOs and other executives often make decisions based on meeting short-term earnings projections, instead of thinking about what moves will create the most shareholder value over the long run.
Several experts and Wall Street insiders have spoken out against the quarterly earnings system in recent years for this very reason.
And, while he stopped short of calling for an end to quarterly earnings, billionaire investor Warren Buffett said in support of ending earnings guidance that "when companies get where they're sort of living by so-called 'making the numbers,' they do a lot of things that really are counter to the long-term interests of the business."
It's not that CEOs are necessarily trying to do anything detrimental; they're just often being incentivized in the wrong ways. CEO compensation is often tied to the stock's price, which can be highly reactive to quarterly earnings reports, so it's understandable that meeting analysts' expectations often becomes a higher priority than it should be.
Additionally, there are often events that affect quarterly results that are not good representations of the health of a business. As JPMorgan Chase CEO Jamie Dimon recently said: "Quarterly earnings, they're a function of the weather, commodity prices, volumes, competitor pricing. And you don't really control that as CEO..."
Finally, producing quarterly reports can be rather costly and time-consuming. In his tweet, Trump said that switching to a six-month reporting system would save money, and he's probably right.
The problem with fewer earnings reports
A big drawback to reducing the frequency with which companies report earnings is that it would mean that less information would be available to the public.
Informing the public about the companies they can invest in is a primary reason the Securities Exchange Act of 1934 was implemented in the first place. Opponents to dropping quarterly reports say that doing so could put everyday investors at an even greater disadvantage to professionals, since information would be less readily available.
Does it go far enough?
Moving to a six-month reporting system would almost certainly save companies money in compliance costs, but it may not entirely solve the problem of short-term thinking by executives.
In 2016, Ed deHaan, a Stanford Graduate School of Business professor, told the radio show Marketplace that simply extending the time between reports wouldn't be enough as long as compensation is based on short-term targets. "Compensate that manager based on the performance of that company over a long horizon, what's going to be best for shareholders in the long term," deHaan said.
However, if the goal is to encourage managers to stop thinking about short-term targets, fewer earnings reports could certainly be a step in the right direction.
We'll have to wait and see what the SEC finds, but this is an idea that could certainly continue to gain traction in the current pro-business administration.