What do Tesla CEO Elon Musk and President Donald Trump have in common? Both have an outspoken disdain for the media, a penchant for breaking (and making) news via Twitter and an extremely dedicated fan base. Now both are taking up the charge against short-term thinking when it comes to corporate earnings.
Musk, when explaining his initial desire to take Tesla private (via Twitter), noted how the short-term pressure of reporting corporate earnings every three months detracts from his company’s long-term mission. Trump, on August 17, dropped his own tweet on the subject: “In speaking with some of the world’s top business leaders I asked what it is that would make business (jobs) even better in the U.S. ‘Stop quarterly reporting & go to a six month system,’ said one. That would allow greater flexibility & save money. I have asked the SEC to study!”
Since Trump’s tweet, an onslaught of supporters and detractors have registered their two cents on the debate of how frequently companies should be required to report earnings. And indeed, the U.S. Securities and Exchange Commission has already begun studying the issue.
Back up. What are earnings reports?
Since 1970, the SEC has required public companies to report their earnings every quarter. So for a few weeks every three months, Wall Street experiences an “earnings season,” when companies from Amazon and Apple to Zillow reveal to the public, including investors and regulators, what they’ve been up to. That includes key accounting details, such as costs, revenues and profits, as well as any updates on current projects and plans for future growth.
What’s the problem with that?
“Short-termism.” Many people, like Musk, blame quarterly reports for forcing companies to focus on producing short-term wins rather than investing for the long term. For example, companies might eschew spending on research and development because doing so would cut into profits now even though it might result in greater gains later.
A number of other high-profile leaders—including outgoing PepsiCo CEO Indra Nooyi (the “one” Trump referred to in his tweet), J.P. Morgan’s Jamie Dimon, BlackRock’s Larry Fink and Berkshire Hathaway’s Warren Buffett (yes, the Oracle of Omaha himself)—have vocalized these concerns and argued for a switch to semi-annual reporting, every six months.
Who would disagree with the likes of them?
Well, the argument for quarterly reports boils down to transparency. Often, these reports, along with the accompanying conference calls with management, are the only detailed looks regular investors like us get at the businesses we, in part, own. And if you’re going to invest in individual stocks, you need as much—and as up-to-date—information as possible.
In fact, financial advisor Barry Ritholtz suggests we head in the opposite direction and move to daily earnings reports. “More frequent reporting makes the data less significant,” he wrote, noting too that less frequent reporting would turn those events into bigger spectacles with price swings to match. “Once financial reporting becomes daily, the short-term earnings obsession will all but disappear. In its place will be a focus on broader profit trends.”
So, who’s right?
Who knows. The SEC is expected to put out an update on the matter soon. But even if the regulator comes down against quarterly reports, don’t expect the decades-old practice to die immediately. Changing laws takes some time, and the effects on companies’ bottom lines would take even more time to manifest.
What does all this mean for me?
As an investor, you do want to keep an eye on how the companies you invest in are doing. But stock prices fluctuate every day for a variety of reasons—whether it’s better-than-expected news about a specific company’s prospects or a disappointing jobs report, or even a tweet from the president.
Those business leaders who are anti-quarterly reports have a good point: Long term is the right view to take. Whether you’re running a Fortune 500 company or your own investment portfolio, you don’t want to get bogged down in the nitty gritty of what’s happening now or in the next three months. You want to stay focused on your long-term goals and follow your plans to achieve them.