No, Quarterly Reports Haven’t Crippled Long-Term Thinking
(Bloomberg) -- Since the Great Depression, businesses and the American public have had a simple agreement: People give companies money in the hope that it’s spent in a way that increases value. Companies disclose every three months how things are going. President Donald Trump is thinking about doing away with that.
“Short-termism” is a classic boardroom bogeyman. Yet the popular notion, that the churn of the quarterly earnings cycle mandates short-term thinking, has failed to register at some of America’s most successful public companies. Alphabet Inc., Amazon.com Inc., Apple Inc. and Intel Corp. all submit to their quarterly disclosure obligations, while spending aggressively on projects that may not lift their bottom lines for years or a decade, if ever.
In tech, investors often tolerate plenty of risk: Google started working on self-driving cars almost a decade ago and is only starting to experiment with ways to make money from them. Intel spends close to $20 billion a year on R&D, new plants and equipment. It might help that speculation on the future is often funded by the fruit of historical risks. The iPhone, for example, came from years of internal research into touchscreen technology, an acquisition of a technical shop specializing in the field and lessons from past projects, including failures like the Newton. Technology, which is dominant on the stock market today, is an entire industry built around long-term thinking.
More broadly, too, U.S. investors are demonstrating a willingness to buy on optimism for the future. One indicator is that stocks are more expensive. The average price-to-earnings ratio in the S&P 500 Index is near a two-decade high. For companies that don’t even make money, like Tesla, price-to-sales is similarly ebullient.
Trump told reporters in Washington on Friday that the idea for a six-month financial reporting cycle came from Indra Nooyi, the outgoing chief executive officer at PepsiCo Inc. It’s natural for Nooyi to express frustration at the stock market, considering the rocky year Pepsi has had. But the biggest drivers of Pepsi’s volatility this year had nothing to do with quarterly earnings reports. It’s just not a good time to be a purveyor of bottled corn syrup. As she diversified into healthier foods, investors rewarded Nooyi throughout most of her tenure as CEO with a price-to-earnings ratio that exceeded the market average. It’s not clear what she would have done differently over those 12 years if her finance department got an extra three months between reports.
In 2013, the European Commission did essentially what Trump is proposing. It changed the rules so companies are only obligated to report every six months. Officials cited largely the same reasons for doing so: The move would reduce short-termism and save businesses money. Four years later, most of the companies in the FTSE 100 Index, including virtually every multinational, still report quarterly, according to data from the Investment Association.
Analysts offer numerous reasons for the default to quarterly: More regular reporting minimizes the chance of shocking shareholders when things are going wrong; companies need to track this stuff anyway, so fewer public reports won’t practically save any money; and investors pay a premium for more information.
Companies that can’t afford to report quarterly, or simply prefer not to give so much information to the public, already have an alternative: Go private. That’s what Michael Dell did five years ago—before he decided to list his company’s shares publicly again in July. That’s what Elon Musk is proposing to do now with Tesla Inc., in between allegedly drug-fueled tweeting (which he has denied) and bizarre interviews with the New York Times.
But being private, it turns out, doesn’t generally lift the burden of disclosure. It just means companies have fewer people to tell. When private equity managers agree to give a company the sums they’ve handed out to, say, Dell Technologies Inc. or Uber Technologies Inc. or Tesla if it wants to pull off Project $420, they tend to expect updates on how their investment is doing. Many large, private companies hold quarterly investor calls or send regular updates to major shareholders on their own accord. Uber makes them public, even though its shares aren’t publicly traded yet. If Uber can own up to its spending habit and still be America’s most valuable technology startup, then public companies should be able to keep up their end of the bargain.
And here’s what you need to know in global technology news
Tesla’s board must decide how to balance loyalty to its volatile CEO with obligations to shareholders. While the automaker’s directors have personal ties to Elon Musk, his worrisome public comments may force action. The stock dropped 9 percent on Friday, but at least Tesla is still on track to improve Model 3 production.
Elsewhere in Elon land, Boring Co. asked the Trump administration for tariff relief. The billionaire’s startup submitted a formal request for a tax break on Chinese tunnel-machinery parts.
Google is reportedly preparing a Home device with a display. The voice-controlled product sounds a lot like Amazon’s Echo Show, based on a Nikkei report.
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