Quarterly financial reporting for public companies is costly and ties up senior management and board members for several days before each quarterly earnings report is released and the 10-Q is filed. Could this process be made more efficient and less frequent, such as a semi-annual filing like many reporting companies based in Europe have implemented? That was one of the questions considered by a roundtable hosted by the SEC's Division of Corporation Finance where key stakeholders delved into the impact of short-termism on U.S. capital markets and whether the SEC's current reporting system needs to be changed to ease administrative and other burdens on reporting companies.
In their request for comments the SEC was specifically interested in exploring ways to promote efficiency in periodic reporting by reducing unnecessary duplication in the information that reporting companies disclose and how any changes might affect capital formation, while enhancing, or at least maintaining, appropriate investor protection.
In his opening remarks SEC chairman Jay Clayton emphasized the importance of focusing on the long-term interests of main street investors. "We also must recognize that our main street investors who have entered retirement or have another expense, such as paying for tuition or an unforeseen event, need liquidity," he said.
The roundtable agenda and the comments that the SEC has received on the subject so far indicate that if steps are to be made to foster a longer-term perspective in American companies, these issues need to be examined from two points of view, he explained.
The first would be to look at the macro forces that drive short-term behavior in U.S. markets generally and explore market-based initiatives to address them.
In closing he asked the panelists whether "we can we more efficiently get information to investors that today is included in earnings releases and often repeated in quarterly reports." In addition, do companies focus on the long-term performance of their businesses given the requirement of quarterly reporting?
The first panel considered the causes of a focus on short-term results in U.S. capital markets and the impact of this focus, including the market drop off in new public listings. Moderator of the first session William Hinman, director of the agency's Division of Corporation Finance, noted that from the over 80 responses received to date, most have expressed support for the current reporting system while acknowledging that there is considerable room for improvement in the process.
Panelist Mark Roe, professor of law at Harvard Law School, said that if we can streamline the reporting process and make it less costly then this is a better way to make public markets more attractive. This was a point echoed by Tim Cohen, co-head of the Equity Division at Fidelity Investments. The burden of the production of 10-Qs has certainly gone up over time. This fact has contributed to a significant number of public companies reverting to private entities once again and, consequently, removed the opportunity for investors to benefit from the future growth of these companies.
Public drop off
U.S. listings have fallen by a dramatic 50% over the past two decades according to a paper – "The U.S. Listings Gap" – published in the Journal of Financial Economics in 2017. In addition, the panelists noted that thanks to the easy access to capital, private companies can raise significant amounts of venture investments and other capital on equal or better terms than in the public markets. The incentive to "go public" is therefore not as great as it once was, particularly when the compliance with public company corporate governance is factored into the equation.
The panel also considered the question of companies issuing a future earning guidance with their quarterly financial releases. This information invariably leads to a more short-term focus on the behavior and performance of companies to the detriment of their long-term goals.
Since it is not an SEC requirement for companies to issue quarterly earnings guidance, the panelists agreed that it should discourage this practice, which they said contributed to short-term market behavior.
The second panel considered the current reporting system's role in helping to fostering a long-term focus by companies and the investor community.
Stacey K. Geer, chief governance officer and deputy general counsel and corporate secretary at Primerica Inc., who was representing the Society for Corporate Governance, said from 250 responses to a survey on financial reporting, 90% said the current system is cumbersome and time-consuming. Given this burden, panelists said that one option for the SEC would be to consider reducing the frequency of disclosure, particularly for smaller issuers. However, regarding the importance that investors attach to the release of quarterly earnings, some said that rather than reducing their frequency it would be better for the SEC to concentrate on finding acceptable ways to make the process more efficient and reduce the duplication of information, without sacrificing corporate governance.
Streamlining the process doesn't mean any less information would be released to investors about the performance of companies, noted Steven Jacobs, partner at EY.
Overall, the message to the SEC from the roundtable panelists was that timely reporting is important, but the requirements for the process need to be updated to help remove the duplication of information that is released in earnings reports and 10-Qs.
The discussions will continue as the commission is examining a number of reporting requirements that have been in place for several decades. They need to be revisited. For example, it has just called for comments on proposed amendments to modernize the description of business, legal proceedings, and risk factor disclosures that registrants are required in Regulation S-K. These disclosure items, the SEC explained, have not undergone significant revisions in over 30 years. The amendments are intended to update rules to account for developments since their adoption or last amendment, to improve these disclosures for investors, and to simplify compliance efforts for registrants. The aim of the proposed amendments is to improve the readability of disclosure documents, as well as "discourage repetition and disclosure of information that is not material."
The comment period is open for 60 days.