President Donald Trump is no stranger to starting controversies with his tweets. His latest one has caused a few waves in financial circles.
Citing a talk with Pepsi’s outgoing CEO Indra Nooyi, Trump said that instead of quarterly financial reports, it would be better for companies to move over to a six-month system. Trump claims that he already has the country’s Securities and Exchange Commission (SEC) looking into implementing the change.
Quarterly financial reports are one of the mainstays of the US financial system. They have been since the Securities Exchange Act of 1934, which was passed a few years of the 1929 stock market crash.
The law requires that all publicly traded companies release their sales and balance sheets every three months and every year. This is to ensure that shareholders know how a company is performing.
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!
— Donald J. Trump (@realDonaldTrump) August 17, 2018
The laws that require disclosure on how well a company is doing financially have been actually tightened since then. This was mainly in response to the collapse of three big companies back in 2002. Nowadays, shareholders expect companies to update them regularly on the financial health of a company.
Not all countries do it this way. Members of the European Union have companies report on a semi-annual basis, though those that operate in both the US and Europe usually release quarterly reports. According to Nooyi, the suggestion for bi-annual reports was part of a broader suggestion on how to orient companies to look at the long-term rather than the short-term.
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Experts Back Trump’s Push
Surprisingly, many experts are thinking the shift would be a good idea. They think that US based have been focusing on meeting short-term goals in their quarterly reports. The pursuit of short-term success often ignores the effects on long-term strategy. They say that quarterly reporting is losing relevance and is just a distraction to management.
However, there are also a group of financial experts who are advocating keeping the reports. Shareholders and investors are mostly on this side of the argument. Publicly-traded companies have the responsibility to their investors and the public to be transparent about how they are doing. This ensures that investors have the right information to influence their investments. Reduced transparency would also give company insiders an unfair advantage.
The SEC is still considering it and the agency released a statement a few hours after Trump’s tweet.
In a statement, Jay Clayton, chairman of the SEC, said
Recently, the SEC has implemented — and continues to consider — a variety of regulatory changes that encourage long-term capital formation while preserving and, in many instances, enhancing key investor protections. In addition, the SEC’s Division of Corporation Finance continues to study public company reporting requirements, including the frequency of reporting
