The Securities Exchange Act of 1934 provided the Securities and Exchange Commission with the authority to prescribe the frequency and content of periodic financial reports. Quarterly reporting has been required for publicly traded companies in the United States since 1970 when the SEC adopted Form 10-Q. However, quarterly earnings guidance by public companies is provided voluntarily.
Typically, the chief executive officers and/or chief financial officers use earnings guidance, given on quarterly conference calls and in other forums, to provide equity analysts, shareholders and other market participants information about their companies’ expected financial performance. Wall Street analysts use earnings guidance to help build and update valuation models, produce research and offer stock recommendations for investors. Exceeding or missing “the numbers” or “expectations” can often result in large, immediate stock price changes.
Last year, Standard & Poor’s 500 companies issued forward quarterly guidance at the highest rate since 2008, according to a report by S&P Global Market Intelligence: over the past year, 146 S&P 500 companies issued quarterly EPS guidance compared to 107 S&P 500 companies over the past five years.
Recently, leading voices in corporate America, such as Warren Buffett, Jamie Dimon, and Larry Fink, have criticized quarterly guidance. They argue that it encourages shareholders to focus on short-term profits and share-price returns, hinders a company’s ability to achieve long-term goals and, thus, should be ended.
The opposing view is that, by providing earnings forecasts, companies improve communication, help their stock prices and create a short-term spotlight on their financial results which, in turn, drive them to improve their earnings.
While quarterly financial reporting in the United States has been in place for decades, just semi-annual reporting is required in the United Kingdom and the European Union. Asia Pacific companies report on a quarterly or semi-annual basis, depending on the jurisdiction.
While less frequent reporting could result in lower costs for companies and reduce short-term demands and expectations, the quarterly cadence is part of the transparency of our domestic markets and provides timely information to assess a company’s progress towards its long-term goals.
We believe that the markets are not ready to give up quarterly reporting and that doing so would not be consistent with a timely, informative disclosure regime. It is important to provide investors with prompt, complete information to help them make well-informed investment decisions.
It is appropriate that Boards, management teams and shareholders focus on long-term shareholder value. However, how do you define long-term? It is likely that different shareholders will have different “long-term” time horizons.
Certainly, progress towards long-term goals should be monitored. We believe that it is not time to eliminate quarterly reporting, but do encourage the elimination of quarterly guidance; we support limited annual guidance with the potential to eventually eliminate it. We also suggest an increasing focus on explaining in some detail a company’s strategic plan and how long-term shareholder value in excess of the cost of capital should be created.
At Current Capital Partners, we pride ourselves on a full range of services to help clients achieve their strategic and financial objectives. We serve clients with mergers and acquisitions advisory services, corporate management services, and private equity investing.
Jonathan F. Foster
Founder & Managing Director – Current Capital Partners LLC
Associate – Current Capital Partners LLC