Trump, Buffett, Dimon, Tesla, Dell and the Quarterly Reporting Question
Back in June, I wrote a piece (here) looking into Jamie Dimon (CEO of J.P. Morgan Chase NYSE:JPM) and Warren Buffett’s (CEO of Berkshire Hathaway NYSE:BRK.A) piece in the Wall Street Journal (paywall) called “Short-Termism is Harming the Economy”. In it, the two titans of finance went on to explain that the quarterly reporting cycle associated with listed companies in the US was causing executives and managers at publicly traded companies to focus more on short term monetary results rather than longer term strategic objectives.
Yesterday, Donald Trump tweeted that he had asked the SEC to investigate whether a shift to a 6 month reporting cycle would help things and opinions in the financial world are heavily split. Certainly many companies would rather have the less onerous reporting obligations and it would mark alignment with some markets (the UK dropped the quarterly reporting cycle back in 2014) while conflicting with others still using the traditional quarterly cycle.
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
Ultimately we’re looking at an odd mix of factors which will likely drive the decision on this topic. Obviously there are costs associated with earnings reporting, both in terms of cash and time with executives needing to review and sign off on documentation, do analyst call dress rehearsals to try to prepare for the kinds of questions firms guiding the investment decisions of the market will have as well as paying auditors. Beyond that though there is a question as to whether companies have become particularly adept at managing the process and analyst expectations so that they can regularly beat consensus estimates and enjoy the benefits that brings to their stock price.
Then you have the other end of the spectrum. Companies and executives that are so disillusioned with the entire process that they have quit the public market entirely (Michael Dell and his eponymous company) or would like to (Elon Musk and Tesla NASDAQ:TSLA). These executives feel that the market has misunderstood them, their mission, the value proposition of their firms and the strategic objectives they represent. Activist investors such as Carl Icahn (a major Dell detractor) or Crispin Odey (of Tesla shorting fame) try to convince companies that they are on the wrong path and need to change direction, leadership or strategy.
The CEO Sales Job
The CEO has an interesting position. Part visionary, part strategist, part salesperson, the CEO of a public company has multiple sales jobs. First of course they have to convince the buyers of their offering that they are the best, their offering the greatest value or some other unique selling point (USP) which will drive adoption of their company’s product. However in addition to that, they also have to bring their investors along with them. In a private company, that can (not necessarily will!) be easier to do than under the crushing gaze of Wall Street. Companies which are private have often gone through rounds of fundraising and refined the sales pitch to get investors onboard either early on during the startup years or later on as they take a company private.
It is absolutely (usually) trickier to maintain the faith of the wider investment market for a CEO than it is for a limited pool of investors who have already bought into your strategy and value proposition. The increasing likelihood of conflicting views of shareholders is greater the larger the pool of owners, but overall if you can manage it there are huge benefits to being a successful publicly traded company including attractiveness to employees and the ability to grant easily valued long term incentives like options or stock. The wealth generation associated with a company which the market believes in as it grows. The frenzy of adrenaline that comes with earnings reporting.
But it’s a double edged sword. An unsuccessful company with a turnaround strategy which isn’t working will find itself having major problems whether dealing with activist investors arguing in the press that management isn’t on the right track, plummeting stock prices and the risk of takeover associated with that. Long term poor performance may make it harder for the company to raise capital via the bond markets and as investors and bond holders lose faith, a perfect storm leading to the ultimate failure of the company can arise.
In this situation, the sales job of the CEO becomes potentially even more important which is where you can see the alternating approaches of someone like Amazon’s (NASDAQ:AMZN) Jeff Bezos vs Tesla’s Elon Musk. Amazon by many metrics is not making as much money as it should be. Bezos’ continual drive to diversify has seen the bookseller become a cloud provider, smart speaker maker, AI company and successful device maker (kindle e-readers/tablets) and failed device maker (fire phone). What Bezos has been incredibly successful in though is keeping the market with him as he continues his diversification objective and always seeks news business lines, despite the drag this sometimes places on the Amazon bottom line.
Some companies undoubtedly have big objectives in mind and these can be a struggle to convince the wider market to buy into. Private enterprise obviously exists to create wealth and sometimes the wealth generation expected in short term periods such as a quarter can struggle to compete with business objectives which are measured in years or more. Forward guidance is a knife edged, high wire balancing act. Too conservative and the market will know you’re talking down your prospects and ignore you. Too bullish and you risk angering investors when you don’t hit expected targets.
The 3 or 6 month question is an ongoing one and realistically, what people will find is that some people do the CEO sales job to the investment market better than others. Those that do a good job will reap the rewards both short term as well as medium and longer term. Even those who don’t do a polished act (Musk has struggled recently with what is expected of him as he insults analysts, tweets potential regulation breaching messages and discusses whether he is stoned or not while working 120 hour work weeks with the worst yet to come), should ultimately reap the rewards of their success if they prove that their long term objectives are what the market needs and desires.
The feeling is that someone like Musk is probably less suited to the extreme level of scrutiny that being a publicly traded company brings than someone like Bezos so whether he bemoans short sellers who don’t believe in the Tesla thesis or not, 3 month vs 6 month reporting is probably less relevant to him. Being private is an absolutely relevant business model, it can just make other aspects of running your business harder. Undoubtedly if Musk was able to take Tesla private, there would probably be an initial honeymoon period during which he wouldn’t have to push so hard to hit profitability, but that doesn’t necessarily answer the 3 or 6 month question.
Investors like detail and the more frequent the data points, the easier it is to prevent bigger losses or gains. Longer reporting cycles will likely lead to greater price volatility which is not the end of the world but in that scenario it’s a zero sum game and there will be winners and losers. It’s going to be interesting to see what the SEC makes of the proposal.