Donald Trump has developed a reputation for having policies that provoke a marmite reaction – certain people love them, others hate them. It is therefore interesting that one of his latest ideas appears to have garnered relatively widespread support, and it is one that is relevant to investors.

Trump has proposed that US-listed companies move from a quarterly to a six-monthly reporting schedule. That would put the US in line with how companies in Europe, including the UK, report their earnings.

Trump says moving US companies to six-monthly reporting ‘will save money and allow managers to focus on properly running their companies’.

Bigger European names issue a trading update for the first and third quarters, providing basic insight into how their business is faring without going into the nitty gritty of profit and loss figures. This helps investors to take the pulse of a business; and it could be the blueprint for US companies to follow if the reporting rules do change.

Where it might not work is if US companies do not publish Q1 and Q3 trading updates in between their six-monthly results. That is the case with smaller companies on the UK stock market and the lack of information is frustrating. In a worst-case scenario, UK small caps use their half-year results to give bare-bones details, and they wait until the full-year figures to give detailed commentary.

ARGUMENTS IN FAVOUR OF CHANGING US REPORTING FREQUENCY

Reporting a full set of financial results once a quarter has its downsides. It takes time and money to build, verify and publish the accounts. It also consumes management’s time as they must answer questions from investors, analysts, and journalists.

One could argue that is part of their job, but there are more worrying aspects to a quarterly reporting process. Primarily, it can encourage short-term thinking.

Management provides forward guidance to the market to set expectations for the next quarter and the full year. Once the new quarter begins, if it looks like they will miss the next quarter’s target, there is often a temptation to make decisions purely on trying to hit the goal and potentially ones that might not be in the longer-term interests of the company.

Three months is too short a period upon which to judge performance. While businesses may monitor daily, weekly, and monthly sales figures, they will also look at longer-term trends and investors should be thinking in the latter terms too.

It is inevitable there will be unforeseen issues on occasion, and companies will need time to identify solutions and take actions. Short-term blips in performance are common – what is more important is whether companies can adapt and thrive. That is why it is better to judge performance over six to 12 months, not 13 weeks.

Quarterly results create an information overload for investors. Occasionally, you might see 10 or more large cap companies report their figures in a single day. The average investor might struggle to undertake meaningful analysis of every company. Even stock market analysts may struggle to absorb all the information beyond the headline figures. However, the advent of AI has made it easier to get summaries of all the key points.

There is school of thought that less frequent reporting has the potential to reduce stock market volatility. Investors are constantly repositioning their portfolios every time a company reports their results. If news flow is less frequent, they might not trade as much, and we might see fewer share price swings. I have no tangible evidence for that, but there is logic to this argument.

ARGUMENTS AGAINST CHANGING US REPORTING FREQUENCY

The requirement for US companies to report results once a quarter means there is steady news flow upon which to make investment decisions. It can also help to keep tabs on trends in sectors and the economy.

Quarterly reporting can help investors spot the first signs of any challenges or bigger problems.

There is a risk that switching to six-monthly reporting gives insiders or those with private sources of information more of an edge. Strict rules prevent people from placing trades when in possession of inside information, yet that relates to specific facts, not something vague or general.

Fans of the current quarterly reporting system might assert that it has worked fine for decades. They might argue that US stock markets have just hit another record high and investors are happily making money in a quarterly reporting environment, so why change something that is not broken.

WHAT HAPPENS NEXT?

At the time of writing, the US Securities and Exchange Commission seemed in favour of Trump’s proposal to switch reporting frequency. In an interview with CNBC, SEC chair Paul Atkins suggested that if the rule change went ahead, US companies would have the option to report every three or six months.

Giving companies a free choice would be a surprise – surely it is better to have uniformity with reporting, rather than a mishmash of frequency? Just imagine one company in a sector reporting every three months and another company every six months. It would be hard to make an apples-for-apples comparison, and that could feed into potential valuation discrepancies.

There is much more to debate on this topic. For now, it is worth concluding with two suggestions put forward in 2016 by Robert Pozen, a senior lecturer at MIT Sloan School of Management, as the ideas remain as relevant today as they did then.

Pozen suggested two ways to address the problems of short-termism that come with quarterly reporting. First, stop publishing earnings guidance for the next quarter to remove the risk of managers chasing short-term targets and not thinking strategically. Second, award bonuses based on three to five-year performance goals, not 12 months. Both would encourage long-term thinking.

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