The administration in Washington recently asked the SEC to study the potential for semi-annual (i.e., six-month) financial reporting for public companies. As a Chief Financial Officer with both public and private company experience, and as CFO of a company that (among other things) helps customers prepare financial reports, I thought I’d offer my perspective on this proposal. Proponents of this idea typically argue several points. Let’s examine them, reviewing both the pro and con argument for each.
Short-term Thinking and Quarterly Pressures
“Quarterly reports are said to push management to forgo attractive long-term projects to meet the expectations of investors and traders who want smooth, rising earnings from quarter to quarter… But while quarterly reporting has drawbacks, the costs of going to semiannual reporting clearly outweigh any claimed benefits.” Robert C Pozen and Mark J Roe, Those Short-Sighted Attacks on Quarterly Earnings
Yes, having to put up and make quarterly numbers increases pressures on companies, but there is little data to support that they make poorer decisions as a result. Technology can help keep management more real-time to reduce the delay between management changes and financial results. Dashboards and automated reporting are becoming more prevalent and pervasive as companies want to keep up with the pace of change and adapt to the continuous need for improvement.
Moreover, those who feel strongly that public market pressure and/or non-understanding of public market strategies, can always go private – the latest example being Tesla CEO Elon Musk’s recent tweet about taking the company private to get away from short-term earnings pressures. Given that as an alternative – which in some cases is valid – companies do have the choice to either remain public and be subject to quarterly pressures or go private and make bigger, more structural long-term changes. But changing from quarterly to semi-annual reporting isn’t going to enable such dramatic changes anyway so it’s kind of a neither fish nor fowl solution. Either stay public, report quarterly, and be subject to those pressure or go private and avoid them. But semi-annual reporting is a No Person’s Land in between.
Transparency with Investors and Analysts
Quarterly earnings reports are the bread and butter of information for stockholders and analysts that want the most up to date information, and are also regarded as a way to maintain transparency with companies they invest in. The longer six-month vs three-month period also creates more potential for a gap between insider and public information – and could possibly increase the likelihood of insider trading.
A study published in the Kelley School of Business Research actually found that with the reduction in transparency and lack of information from semi-annual earnings announcements, investors would tend to over-react to news from competitors or other information about the industry in the news. This indicates that even if companies choose to go to semi-annual reporting cadence, that investors will invariably seek other sources of information to make their investment decisions.
The Reduction of Burden for Financial Reporting
Financial reporting is tedious work in many public companies, and much of this work is low value-add ticking and tying out of the numbers to eliminate mistakes. But remember that most private companies, following the public company lead, also produce quarterly reports and in addition do at least monthly management and board reporting. The public financial reporting burden typically represents a relatively small increment of work to what the company would be producing anyway. So, while it could reduce the strain on producing the “last mile” of those public financial reports, the burden does not change that much, as the last mile is only a fraction of the total cost The real solution here is to attack the underlying problem – the labor it takes to consolidate, close, and reporting – and to do so via automation.
While the stress of reporting quarterly is undeniable, the benefits of less frequent semi-annual reporting are not. The modernization of Finance and the role EPM plays in today’s world aim to make the process of disclosure more transparent, not less. As we see in these studies, semi-annual reporting doesn’t achieve that goal. However, the onus of monthly/quarterly reporting lies in the capabilities of the systems, technology, and process you deploy.
The correct answer is to keep the quarterly reporting and reduce the production burden, which is exactly what we do at Host Analytics. If you want to reduce the drag on the team and continue to meet investor expectations of a public entity—look at the technology you deploy. And given the ways things are going, given our current state of reporting and disclosing technologies, I’m surprised we haven’t moved to a monthly cadence, but I’ll save that debate for another blog post.
What do you think?