Randy Wilson, Cendrowski Corporate Advisors
By Randy Wilson
Amidst the discussion following President Trump’s mid-August ask of the Securities and Exchange Commission (SEC) to study dialing back corporate financial reporting to twice a year, perhaps the most salient long-term issue has been ignored – namely, the potential impact on private companies and their decision about whether or not to go public.
Without question, the complexion of the U.S. capital markets has changed drastically over the last two decades. About 3,600 firms were listed on U.S. stock exchanges at the end of 2017, down more than half from 1997. Citing a myriad of reasons – from easier and cheaper access to private capital to once-in-a-generation low interest rates in the bond market to burdensome regulations following Sarbanes-Oxley and, later, Dodd-Frank – companies are staying private longer.
Incremental efforts from the JOBS Act to reforms included in last year’s tax reform law have helped at the margin – but in order to redirect the current trajectory of the public markets a more fundamental change may well be needed.
Cutting the current schedule of quarterly reporting in half holds the prospect of enticing more companies to go public. The benefits of less-frequent formal reporting include reduced costs (especially in staff time and outside legal expenses), a longer-term focus on growth, and the ability to escape the pressure of meeting the Street’s expectations every three months (and the high-wattage media coverage that comes with it).
At the same time, companies clearly have the ability share information through social media – especially with respect to non-financial metrics including industry trends, global imports when they are relevant, brand equity and value – that investors will find particularly useful in real time. Such communication, of course, should be managed carefully. Tesla CEO Elon Musk’s recent misguided use of Twitter to indicate an imminent going-private transaction, highlights one obvious risk.
Former SEC Chairman Harvey Pitt, in making the case that the SEC could balance paring back the quarterly reporting schedule in exchange for more information delivered to the marketplace more often, added that a reduction in reporting costs is “something that investors should want as well.”
It is often said that private companies preparing to go public are well advised to act, in the year before they do so, as much like a public company as possible – and thus they would be among the first to welcome the time and cost savings of bi-annual reporting. At the same time, the ability to deeply concentrate on running the business, optimizing operations, and looking ahead for growth are naturally on the top of the entrepreneurial priority list.
In turn, corporate leaders are well positioned to make the first move in order to positively influence the fullest possible range of stakeholders to assuage concerns that an end to quarterly financial reporting will have an overall positive marketplace impact. Overcoming decades of precedent and answering question about potential stock price volatility, and a host of other issues, will not be easy, or happen overnight.
Surely the SEC will study this issue intently, with interest groups and politicians lining up on both sides of the issue. Given this topography, it is incumbent on the business community at large, and entrepreneurs of all types, to seize this opening to demonstrate that they can earn the trust of investors through ongoing and transparent communication – and put out the welcome mat to private companies that seek the benefits of the public market.
Randy Wilson leads the Corporate Investigations Group in Chicago for Cendrowski Corporate Advisors, a leading accounting, litigation support, risk management, tax, and compliance consulting firm.
John Jannarone, Editor-in-Chief