John Berlau and Chris Kuiper RACING TO ‘MAKE THE QUARTER’

Hillary Clinton’s right: ‘Quarterly capitalism’ is bad for business


“Quarterly capitalism” is a new focus of Hillary Clinton’s presidenti­al campaign that could pick up even more steam with recent market turmoil. “It’s easy to try to cut costs by holding down or decreasing pay and other investment­s to inflate quarterly stock prices, but I would argue that’s bad for business in the long run,” Clinton said recently.

Some are saying this might be her way of sounding populist while maintainin­g support in the business community. But one need not support all of Clinton’s policy prescripti­ons, such as higher capital gains taxes, to agree with her that public companies racing to “make the quarter” can be a problem.

Yet Clinton and many other American critics of quarterly capitalism have ignored the proverbial elephant in the room — America’s mandate that public companies produce earnings reports every quarter. This rule underlies all the problems that go with it. Internatio­nal comparison­s show that quarterly requiremen­ts not only tend to decrease long-term investment, but also increase manipulati­on of the numbers to please shareholde­rs.


Since 1970, the Securities and Exchange Commission has required virtually all publicly traded firms to file 10- Qs every quarter, while most other countries require only public firms to file financial reports annually or semi-annually.

A memo just published by Martin Lipton, founding partner in the prominent corporate law firm Wachtell, Lipton, Rosen & Katz, asks U.S. policymake­rs to heed internatio­nal calls for “the discontinu­ation of company quarterly reporting.”

For a short while, it seemed other countries would emulate U.S. policy, as quarterly reporting on the surface seemed to promote more transparen­cy. In 2004, the European Union began to require public firms to transition toward quarterly reporting, partly to harmonize financial reporting with the U.S. Yet after outcries both from shareholde­rs and firms — about the cost of the new mandates and concerns that they would lead to short-termism — the EU dropped these requiremen­ts in 2013.

Influencin­g the EU’s decision was a 2012 report from John Kay, respected business author and visiting professor at the London School of Economics. The Kay Review concluded that “quarterly earnings will be dominated by random fluctuatio­ns — or worse, will be managed to avoid them.” Kay cast doubt even on the effectiven­ess of annual company reports, arguing that for many companies, “profitabil­ity can be meaningful­ly assessed only over a period of many years.”

INVESTMENT FLEXIBILIT Y Other research confirms this:

An April study by Jurgen Ernstberge­r, professor of accounting at the TUM School of Management in Munich, finds that companies required to file EU quarterly reports were more likely to experience both a reduction in long-term performanc­e and an increase in earnings manipulati­on relative to the performanc­e of similar European firms before the mandate was in place.

A July study of the behavior of U.S. firms transition­ing to quarterly reporting before the SEC’s mandate in 1970 comes to similar conclusion­s. Professors Rahul Vashishtha and Mohan Venkatacha­lam of Duke and Arthur Kraft of City University London find that mandates led to a 17%-19% decline in long-term investment­s.

Specialty grocery chain Trader Joe’s and convenienc­e store chain QuikTrip have been praised by Clinton and others for their rejection of short-termism in their dealings with employees. The chains have long paid their workers above-average retail wages and provided extensive training, and have among the lowest turnover rates of U.S. retailers.

Yet there is a reason that these businesses might have the resources and flexibilit­y to make these investment­s. Both are private companies subject neither to quarterly mandates nor other costly rules for public firms under laws such as Sarbanes- Oxley and Dodd-Frank.

The late John Shields, Trader Joe’s longtime CEO who pushed through many of the company’s pay practices, told an audience in 2010, “Those of you who are looking at going public, a psychiatri­st should take a look at you.”

Abolishing mandatory quarterly reporting need not shut down frequent updating of shareholde­rs on events affecting the firm. Public companies should be free to provide informatio­n as frequently as they like, provided that the informatio­n is accurate. It’s long past time for the U.S. to follow the EU and end the mandated quarterly numbers race so harmful to economic health.

John Berlau is a senior fellow at the Competitiv­e Enterprise Institute. Chris Kuiper is a former research associate at CEI.

 ?? SCOTT OLSON, GETTY IMAGES ?? Democratic presidenti­al candidate Hillary Clinton campaigns at the University of Wisconsin-Milwaukee on Thursday.
SCOTT OLSON, GETTY IMAGES Democratic presidenti­al candidate Hillary Clinton campaigns at the University of Wisconsin-Milwaukee on Thursday.

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