By Sydney Isaacs and Sheila Ennis

On Monday September 15th, President Trump suggested that companies should have the option to issue earnings twice a year rather than quarterly. This debate is not new, and there are many compelling reasons for moving to less frequent audited earnings reporting. As companies determine the right approach, we recommend that they also consider the role that earnings disclosures play in building relationships and trust with investors.

First: Why issuing earnings twice instead of four times a year is attractive for many companies

1. In theory, it refocuses both investor and issuer attention on longer-term value creation instead of quarter-to-quarter performance (though there’s an argument that this could be accomplished at least in part by issuing guidance less frequently rather than reporting earnings less frequently)
2. It could reduce stock price volatility (it could also do the opposite)
3. It would reduce expense and executive time associated with quarterly reporting (and possibly give the perception of reduced accountability to shareholders)

But quarterly reporting also creates an additional company-owned investor touchpoint

Each earnings report represents an opportunity to build management credibility and trust. Investors today consider a very wide range of factors when evaluating a company’s prospects. Some of that comes from owned company channels (press releases, earnings calls, investor conference transcripts, SEC filings) but it increasingly comes from sources outside of the company’s control (media commentary, social media commentary, competitor disclosures, industry indicators). In the absence of facts, speculation can run wild. New guidance on 13-D disclosures has made some holders more conservative in their engagement with issuers, making every interaction even more important.

There are other challenges as well, such as making it more difficult for companies to determine materiality of new information requiring disclosure if the books are only closed twice a year. Less frequent disclosures also could create challenges with Reg-FD compliance.  And fewer reports would likely reduce trading volume in between earnings disclosures, and more liquid markets are more accurate. But the risk of losing an earnings touchpoint that enables direct communication with shareholders and offers broad access into management’s perspectives and tone via earnings calls, a quote in the earnings press release or commentary on the drivers of past or future performance should also be considered in determining the right frequency of earnings disclosures.

The real answer: It depends

Of course, if companies are provided this choice, the right decision will depend on the company’s model, its industry, management’s existing credibility and reputation with the Street, the composition of the current and the ideal shareholder base, and where the company is in its corporate lifecycle. If the company is in an industry with broad visibility and limited volatility, less frequent earnings disclosures may make sense. This decision requires a case-by-case consideration, but we recognize the value that frequent direct investor engagement focused on facts affords companies.