Ten days after meeting with over a dozen CEOs of major American corporations, President Donald Trump announced on Friday he has an idea he claimed would make “business (jobs) even better.” But his proposal, if enacted, could have huge ramifications for consumers, transparency, and the independence of agencies tasked with regulating the economy.
In an early morning tweet, he anonymously quoted someone he deemed one of “the world’s top business leaders” recommending that the United States “stop quarterly reporting & go to a six month system.” Trump argued it would “allow greater flexibility & save money,” and that he has asked the Securities and Exchange Commission (SEC), a nominally independent regulatory agency, to study the idea.
In speaking with some of the world’s top business leaders I asked what it is that would make business (jobs) even better in the U.S. “Stop quarterly reporting & go to a six month system,” said one. That would allow greater flexibility & save money. I have asked the SEC to study!
— Donald J. Trump (@realDonaldTrump) August 17, 2018
There are a few problems with this.
First, the president could be seeking to use the levers of government to gain a political advantage. The economy and the stock market are both continuing to grow in several key metrics, with one key exception: wages, which have stagnated since the end of the Obama administration. If growth slows further or even declines in 2019 and 2020 — a real possibility given the failure of the GOP tax plan to deliver any significant boost to wage growth as Republicans promised — changing how often companies disclose earnings data could help to mask this, which would make it easier for the president’s supporters to falsely argue he is strong on the economy.
The primary economic impact of this change would be for companies to evade transparency requirements that inform shareholders of the health of these companies. Regular, frequent disclosures give consumers and shareholders important insight on how a company is performing.
“It’s an old idea that folks have been peddling for a long time,” said Andy Green, managing director of Economic Policy at the Center for American Progress. (ThinkProgress is an editorially independent newsroom housed within the Center for American Progress.)
On first blush, the proposal might seem like a decent idea to anyone concerned about corporate short-termism, where CEOs chase high stock prices and short-term earnings at the expense of longer-term economic health. Warren Buffet and Jamie Dimon argued in June that companies should end quarterly earnings projections, which can cause CEOs to “do a lot of things that really are counter to the long-term interests of the business,” as Buffett put it. Green said there is some legitimacy to that idea.
But that recommendation is very different from ending SEC requirements that companies disclose up-to-date key economic data to their shareholders, which is what Trump proposed. It’s one thing to discourage companies from trying to meet needless earnings projections, but another entirely to allow them to go completely dark for six months at a time.
The biggest argument against the current quarterly reporting system is that people wait to make economic decisions on the stock market based on these results. But under Trump’s plan, companies would still be releasing the same crucial data, only compounded even further into six month intervals, making it that much harder for investors or shareholders to course-correct if a company over or underperforms. Less-frequent disclosures can make the market less efficient and transparent.
The fact that Trump said he asked the SEC to study his proposal is itself problematic.
“It is unusual, and I think at a minimum untraditional, and more likely contrary to the traditional independence of the regulatory role of the SEC, for the president to direct the SEC to do things,” Green said. Traditionally the president directs the Treasury Department to do things, which can then work with the SEC to implement the president’s policy.
“It is not appropriate,” Green added. “Independent agencies are independent in law and in practice, and they don’t answer to the White House because it’s been determined that independence is important to their function. Presidents do not direct the SEC to do things. The SEC takes into consideration the president’s priorities, but his authority to do this is not normal authority.”
Green likened it to Trump trying to influence the Federal Reserve not to raise interest rates.
It’s also problematic for Trump to be exerting undue influence on the SEC while his top cabinet advisers and congressional allies get accused of and arrested for insider trading, respectively.