The Journal Gazette
Sunday, August 26, 2018 1:00 am

Less frequent reporting?

Trump floats idea; local executives less enthused to change

SHERRY SLATER | The Journal Gazette

An Auburn-based investment officer, who might be expected to demand more transparency, favors the idea of publicly traded companies reporting earnings every six months.

But executives at two northeast Indiana companies, which have to prepare the reports, said investors are better served by quarterly earnings.

President Donald Trump ignited the discussion a week ago when he tweeted that he'd asked the Securities and Exchange Commission to study whether changing earnings report requirements to every six months would allow executives to stop focusing as much on short-term performance.

Reactions to the suggestion range from enthusiastic support to strong dissent.

Big investors

In a statement released the same day as Trump's tweet, an industry association representing the world's largest investors said it supports keeping quarterly financial reporting.

“Investors and other stakeholders benefit when regulations ensure that important information is promptly and transparently provided to the marketplace,” said Amy Borrus, deputy director of the Council of Institutional Investors. “Investors need timely, accurate financial information to make informed investment decisions.”

The Council of Institutional Investors is a nonprofit and nonpartisan association of pension funds, other employee benefit funds, endowments and foundations. Members' combined assets exceed $3.5 trillion.

In the statement, the council referred to a 2016 report from the SEC's Investor Advisory Committee. In the nine-page document, the SEC group said “the current degree, quality and frequency of disclosure for U.S. issuers overall is appropriate and a source of strength for the U.S. capital markets.”

But that doesn't mean the council supports short-term thinking or toying with when income and payments are recorded to massage earnings reports. 

The organization's executive director, Ken Bertsch, issued a statement in June on the subject.

“When companies are managed for the long term, it creates value for shareholders with long investment horizons,” he wrote. “Practices that encourage long-term thinking and investment create value for millions of Americans without sacrificing the transparency and accountability that investors deserve.”

Creative accounting

Rachel Smith sees pros and cons in changing reporting requirements.

The associate professor of finance at the University of Indianapolis said publicly traded companies might like filing fewer earnings reports because there's a potential to save on fees paid to outside auditing firms, which review the numbers. 

Any good company would keep up-to-date with financial tracking, so not reporting earnings shouldn't reduce the internal financial work, she added.

But, Smith said, if companies reported less often, they wouldn't be as transparent.

“(Investors) like to have as much information as they can, as quick as they can, to make decisions,” she said.

Smith sees another potential drawback. If a company reports earnings just twice a year, it might be more tempted to hide unfavorable items or alter those disclosures to appease shareholders, she said. 

Michael Hicks said the complaint that publicly traded companies are manipulating financial reports to chase short-term results has been around for decades. But the director of Ball State University's Center for Business and Economic Research doesn't buy it.

“I'm skeptical that that is really a thing,” he said. “It's an easy, plausible argument.”

Institutional investors, who own most of the stock now in the market, aren't interested in short-term gains, he said. Hicks assumes most individual investors are like him.

“I have my money in a mutual fund that does very little trading,” he said.

Individual businesses show whether they are doing well, based on executives' behaviors, not just quarterly financial reports, Hicks said. They are required to notify the SEC whenever an executive, director or major shareholder buys or sells the company's stock.

Executives with Steel Dynamics Inc., a Fort Wayne-based steelmaker, and 1st Source Bancorp, a South Bend-based bank, said their companies don't time financial transactions or transfer money from one account to another to boost quarterly earnings.

Jim Seitz, 1st Source's president, said the bank's executives are more concerned about the company's book value than market value. Book value is the total of a company's assets minus liabilities. Market value, which can fluctuate from one minute to the next, is the share price multiplied by the total number of shares.

“I've never been in a meeting,” Seitz said, “where somebody said, 'We need to do this and this to make sure out earnings look better.'”

Other resources

Reading quarterly earnings filings isn't the only way to take a company's temperature.

The SEC requires publicly traded companies disclose “reportable events,” or developments that could reasonably be expected to affect the company's stock price. Examples could include an acquisition, merger or divestiture, loss of a major contract, a government investigation, retirement of the chairman or CEO.

Edison Byzyka, a chartered financial analyst and chief investment officer at Credent Wealth Management in Auburn, agrees valuable information would continue to be available on the SEC's website. Credent manages more than $450 million in assets. 

Byzyka studies industry sectors and the economy overall to help understand what's happening with individual companies. He follows company guidance that estimate future earnings; analyst reports with buy, hold or sell recommendations; and federal economic data including wage growth; personal income levels; consumer sentiment; and gross domestic product reports.

Because so much information is already available, Byzyka favors semi-annual earnings reporting.

“In my opinion, six months is the ideal time frame,” he said.

With access to so many resources, Byzyka would feel comfortable advising a client in June to buy stock in a company that hadn't reported earnings since January.

Byzyka thinks market volatility could be reduced with less frequent reporting. Stock prices sometimes soar or plunge following earnings reports.

Middle men

Some industries – including banking – are so regulated that not filing quarterly earnings reports would do little to reduce paperwork, executives said. Many of the publicly traded companies headquartered in northeast Indiana are banks.

Like competitors, 1st Source generates daily and weekly reports on the marketplace, said Seitz, the bank president.

The bank's executives track daily how much competitors are paying in interest on deposits and charging in interest on loans. In that regard, even quarterly earnings are outdated because they don't come out until about 15 days after a quarter ends, which is already too late to be useful, he said.

Although preparing a quarterly earnings report “does take some time and effort,” Seitz said cutting back to every six months “isn't going to save huge sums of money,” so Seitz is neutral on the idea. 

Complying with SEC quarterly filing requirements does add to operating expenses. Every quarter, staff devotes time to preparing the report that is then printed and mailed out.

But, Seitz added, “if I put my shareholder hat on, it seems it would be better to have more information” than less.

“We manage our organization, first, to make sure we're doing the right thing from a customer standpoint,” he added.

Steel Dynamics executives have a similar view.

“It would be a little less work, but I don't think it's in the shareholders' best interests,” said Keith Busse, Steel Dynamics' chairman. “Bringing shareholders up to speed is probably a good thing.”

Theresa Wagler, Steel Dynamics' executive vice president and chief financial officer, was more introspective. She said SDI has no official position.

“I think there are benefits to both” approaches, she said.

Steel Dynamics would save time and money if it prepared half as many reports, she said. But strategic planning wouldn't change. Wagler said executives already take a five- to 10-year view.

When that approach puts a dent in earnings, shareholders and analysts understand the logic.

“We take time communicating results, which I think is important,” Wagler said.

Reality check 

Ball State's Hicks supports the idea of reviewing SEC reporting rules in general. But as for the idea of reducing earnings reporting to twice a year ... “It just strikes me as Twitter-worthy and no more,” he said.

These types of changes typically take a long time to enact while government officials solicit public comment and consider the implications, Hicks added.

Joe Stieven is equally pessimistic about the outlook for change. He's the president of Stieven Capital Advisors near St. Louis. 

“Even though the concept was originally brought up by Warren Buffett, I believe the chances of getting quarterly reporting moved to every six months is very slim,” he said. “I'm not losing any sleep over it at all.”

History has shown that it takes years to enact a change in SEC reporting, he said. And that's with widespread support, which this proposal doesn't have.

Stieven was reluctant to choose a side but finally admitted he prefers the status quo. He explained it with a parallel example.

If your young child were struggling in school, he said, you wouldn't want the teacher to wait six months before telling you.

At a glance

The following is the full text, unedited, of the message tweeted Aug. 17 by President Donald Trump:

“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!”

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