On Monday, Trump re-floated a proposal he’d made in 2018 and had not gotten implemented, that of reducing SEC reporting for public companies from quarterly to semi-annually. His intelligence-insulting justification was that Chinese companies had 50 to 100 time horizons and this move would help reduce short-termism. If Trump really wanted to get companies to care more about the business of their business, he’d be targeting the price-manipulating exercise known as share buybacks instead. The Financial Times then usefully catalogued how Trump is taking other measures to give CEOs even more advantage relative to investors than before.
This development matters not simply because Trump is about to give one of his key constituencies, CEOs, more power by further reducing the already weak accountability in the US shareholder regime. And this is not just an intra-capitalist money grab, but also undermines one of the few remaining sets of arrangements that helped the US secure and maintain competitive advantage.
Strong investors protection elevated the US into having the cleanest, safest capital markets in the world. That enabled the US to attract capital on favorable terms and made it less risky for smaller or otherwise not-connected investors to participate. Undercutting this regulatory architecture parallels the way Trump is crippling the research programs as a by-product of his ideological war on universities . So even though you will see us also make criticisms below, keep in mind that even with its flaws, and even with deregulation up to now, US capital markets still offer better investor protection than any other.
Big investors do not lose out with the Trump schemes as much as it might seem because many already buy private information. It’s small funds and retail and foreign investors that suffer.
But having said that, we need to debunk some tender myths about “shareholder capitalism.” Boards do not have a duty to shareholders. They have duties to the corporation, of which shareholders are only one of many claimants. And equity is a residual, as in the very last, claim.1 The “maximize shareholder value” myth has been promoted by economists, particularly Milton Friedman in an internally contradictory 1970 New York Time op ed, and later, Harvard Business School professor Michael Jensen.
The big problem for investors in public companies is they already have very weak rights. Share ownership confers a vote that can be diluted at any time and the right to receive dividends when the company has profits and feels like issuing them. And even with the disclosure regime that Trump deems to be too onerous, shareholders are not told about many things that would enable them to make better decisions. As Amar Bhide wrote in a Harvard Business Review article we have often cited.
Bhide started with some straightforward observations:
US rules protecting investors are the most comprehensive and well enforced in the world….Prior to the 1930s, the traditional response to panics had been to let investors bear the consequences……The new legislation was based on a different premise: the acts [the Securities Act of 1933 and the Securities and Exchange Act of 1934] sought to protect investors before they incurred losses.
He then explained at some length that extensive regulations are needed to trade a promise as ambiguous as an equity on an arm’s length, anonymous basis. Historically, equity investors had had venture-capital-like relationships with the owner/managers: they knew them personally (and thus could assess their character), were kept informed of how the businesses was doing. At a minimum, they were privy to its strategy and plans; they might play a more active role in helping the business succeed.
By contrast, investors in equities that are traded impersonally can’t know all that much. A company can’t share competitively sensitive information with transient owners. Stocks are also more liquid if ownership is diffuse, which makes it harder for any investor or even group of investors to discipline underperforming managers. It’s much easier for them to sell their stock and move on rather than force changes. And an incompetent leadership group can still ignore the message of a low stock price, not just because they are rarely replaced, but also because they can rationalize the price as not reflecting the true state of the company compared to its competitors, which is simply not available to the public.
Bhide’s concern is hardly theoretical. The short term orientation of the executives of public companies, their ability to pay themselves egregious amounts of money, too often independent of actual performance, their underinvestment in their businesses and relentless emphasis on labor cost reduction and headcount cutting are the direct result of anonymous, impersonal equity markets. Many small businessmen and serial entrepreneurs hold the opposite attitude of that favored by the executives of public companies: they do their best to hang on to workers and will preserve their pay even if it hurts their own pay. Stagnant worker wages and underemployment are a direct result of companies’ refusal to share productiivty gains with workers, and that dates to trying to improve the governance problems Bhide discussed by linking executive pay to stock market performance. That did not fix the governance weaknesses and created new problems of its own.
So what Trump plans to do is take a regime that is already too executive-friendly and make it even more so.
Let’s start with the initiative that did get press attention, of going from quarterly to semi-annual reporting. From CNBC:
Trump had initially raised the idea in a Truth Social post, saying it is “subject to SEC approval” and would “save money, and allow managers to focus on properly running their companies.”
“Did you ever hear the statement that, ‘China has a 50 to 100 year view on management of a company, whereas we run our companies on a quarterly basis??? Not good!!!’” Trump said….
Supporters of the current system say it provides investors with timely opportunity as well as transparency about public companies.
“When you weigh this out and put it on a whiteboard, the pros of quarterly reporting outweigh the cons,” said Art Hogan, chief market strategist at B. Riley Wealth Management. “Having to wait six months for official results, I just think would cause more difficulties than it would add benefits.”
While executives have come under some criticism for reporting misleading earnings, the use of generally accepted accounting principles — GAAP — has helped provide guardrails that ensure standardization. For that reason, U.S. reporting is considered among the most transparent and reliable in the world.
Despite Trump’s comments about China, companies there have reporting requirements that are similar to the U.S. if not more stringent. Chinese companies must file quarterly earnings reports as well as semiannual and annual reports.
Trump has the votes at the SEC to get what he wants, although it may take a year. Axios interestingly contends that the change will run into enough resistance that companies will continue to report:
Investors “have come to expect quarterly reporting and will exert pressure on companies to continue to provide quarterly reporting,” Erik Gerding, former director of corporate finance at the SEC, wrote to Axios.
I think that’s hopium. But one never knows.
Now to the Financial Times on Trump’s other “making the world safer for American executives” plots:
Donald Trump’s administration was shifting the balance of power from shareholders to company bosses even before the president on Monday called for quarterly earnings statements to be ditched.
In a little-noticed announcement last week, the Securities and Exchange Commission said it would consider ways for companies to limit the risk of shareholder lawsuits, paving the way for disputes to be heard privately rather than in the spotlight of the court system…
The moves, part of Trump’s broad agenda to slash regulations, could reduce transparency and erode the advantages that have helped draw investors into the world’s biggest and deepest capital markets, according to some shareholder advocates.
John Coffee, professor at Columbia Law School, said: “The US has long been known for its lower cost of capital, and I think that is down to its higher level of transparency and the ability of shareholders to go to court for remedies.”
And that’s not all:
The SEC on Wednesday will consider whether to allow companies to go public if their articles of incorporation include mandatory arbitration of securities law claims, according to an agenda posted on the regulator’s website last week. That could move disputes out of the courtroom.
The SEC also this month posted a “unified agenda of regulatory and deregulatory actions” that it plans to pursue which include reforms of the rules for shareholder proposals, designed to “reduce compliance burdens” for companies, and a “rationalisation of disclosure practices”.
Amanda Fischer, policy director at Better Markets, said: “Decades of shareholder rights are under threat due to a multipronged legal and regulatory assault driven by corporate management and their champions in the White House and at the SEC.”…
“It’s fair to criticise investors for their short-termism,” said Carson Block, head of Muddy Waters, the prominent short seller. “However, reducing reporting frequency diminishes transparency any way you cut it.”
He added the move would specifically disadvantage smaller investors because larger entities have vast troves of alternative data, “such as credit card purchase data, which would provide them an even more edge in a semi-annual reporting market”.
Jeff Mahoney, general counsel at the Council of Institutional Investors, said “the requirement to file quarterly financial reports is a key element of the timely and accurate information that underpins the quality and efficiency of the US capital markets”.
The peanut gallery at the Financial Times was largely skeptical. Some examples:
joining the dots
Make America Emerging Market Again!Monte Video
Less reporting? What could possibly go wrong?NewWorld819
The regulations we have in market economies have all, more or less, arisen out of some catastrophe or crisis. They are there to prevent a replay of that catastrophe or crisis. Deregulate and guess what happens…..Xavier
Another nail in the coffin of the market economy and a wonderful opportunity for corruption.
But corruption is a feature, not a bug, in Trump’s America.
_____
1 From Lynn Stout in Yale Insights:
Shareholders do not own corporations. Corporations are legal entities that own themselves. That’s important because it’s essential to their performing their function of aggregating specific investments. If shareholders owned corporations, they could yank those specific investments out any time they wanted to.
Milton Friedman’s claim that corporations are run well when they are run to maximize profits for shareholders is also not based in law. According to a doctrine called the Business Judgment Rule, there is no obligation for the directors of public corporations to maximize profits.
“On Monday, Trump re-floated a proposal he’d made in 2018 and had not gotten implemented, that of reducing SEC reporting for public companies from quarterly to semi-annually. His intelligence-insulting justification was that Chinese companies had 50 to 100 time horizons and this move would help reduce short-termism.”
The timing that I’m noticing in particular: more people are now asking questions about the most recent tech financing circle jerk. If this is all to give more float to a bubble, that’s also short-termism.
Reduce transparency of public companies, open up private investments to retail investors, eliminate central bank independence and reduce the fed overnight target rate in a bull market, combine it all in a great big beautiful bubble. The roaring twenties, twenty first century edition.
If 50 million people signed a petition saying that they would withdraw stock from companies that don’t report, could have an effect. Could boomerang if it stops people investing at all.
Monthly statements should already be required by law.