Keep quarterly reporting – Robert Pozen

From CFO

On August 17, President Trump waded into another complex area by a short tweet. He had apparently asked several top business leaders how to “make business (jobs) even better in the United States.” He then directed the Securities and Exchange Commission to study one business leader’s reply: “Stop quarterly reporting and go to a six-month system.”

Trump’s tweet reflects the belief of many corporate executives and commentators that quarterly reporting pushes public companies away from attractive long-term investments. However, the long-term benefits of semi-annual reporting are doubtful, while its costs are significant.

Shifting company reports to every six months does not meet anyone’s definition of the long-term. An extra three months to announce financial results would not induce American executives to take off the shelf the hypothetical stockpile of long-term, job-creating projects — now allegedly stymied by quarterly reporting.

For years, public companies like Amazon have achieved large market capitalizations by following long-term strategies, as investors waited patiently. Indeed, most biotechs go public successfully without any history of profits, so investors must be endorsing their plans for completing clinical trials and marketing their drugs.

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Six months isn’t long term – Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

Robert Pozen, Senior Lecturer, MIT Sloan School of Management

From Wall Street Journal

President Trump tweeted on Friday that he had directed the Securities and Exchange Commission to study a suggestion from a business leader, later revealed as outgoing Pepsi CEO Indra Nooyi: “Stop quarterly reporting & go to a six month system.” The popular theory is that quarterly reporting discourages firms from making long-term investments.

But switching to semiannual reporting wouldn’t help. Find us CEOs with stockpiles of good, long-term projects that they are not pursuing—but that they would, if only they had three extra months to report earnings. Reporting every six months is nobody’s definition of “long term.” Besides, investors have waited patiently as Amazon, Netflix and many biotech firms have followed long-term strategies.

In 2007, financial reporting in the United Kingdom moved from semiannual to quarterly. Yet capital expenditures and research-and-development spending didn’t fall significantly over the next three to six years, according to a study from the CFA Institute Research Foundation. When the quarterly requirement was ended in 2014, investment by U.K. companies didn’t change.

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Commentary: the BlackRock letter sets ambitious goals. Here’s how CEOs can meet them – Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

From Fortune

Should public companies focus on earning profits for their shareholders, or should they serve broader societal needs? Larry Fink, the head of BlackRock, the largest fund manager in the world, recently issued a letter to company CEOs stating: “Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”

Yet the same letter tells public companies that they should adopt a strategic plan with “a path to achieve financial performance.” The letter reconciles these potentially conflicting objectives by pushing companies to pursue “long-term value creation” rather than short-term profits. In other words, they can enhance their long-term financial returns to shareholders by serving the needs of other stakeholders—even if this lowers short-term profits.

While BlackRock was trying to sensitize companies to their social responsibilities, the letter could undermine the accountability of corporate directors to their shareholders. CEOs could hypothetically justify any decline in annual earnings by claiming they were serving all stakeholders in hopes of increasing long-term financial results. How will shareholders later assess whether these stakeholder-focused policies actually resulted in higher financial returns? And does the long term mean five, 10, or even 20 years? Read More »

Public companies are about to be flooded with cash, how will they spend it? – Robert Pozen and Robert Steel

MIT Sloan Senior Lecturer Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

From Fortune

U.S. companies will soon experience a tsunami of free cash flow. Because of the new Trump-GOP tax plan—the Tax Cuts and Jobs Act—we estimate American companies will have over $2.6 trillion of additional cash over the next five years. This will come from three sources: repatriated overseas cash, future foreign earnings, and lower corporate taxes on domestic profits. The critical question is: What will companies do with this inpouring of cash?

For years, many CEOs of public companies have complained of pressure by analysts and activists to focus on short-term profits rather than long-term growth. Now each CEO has a great chance to put their money where their mouth is.

CEOs have two main alternatives for this incremental cash flow; they can boost short-term returns to shareholders through higher dividends and share repurchases, or they can augment long-term growth by investing in plants, people, research, and technology acquisitions.

For the sake of their credibility and the American economy, we urge CEOs to invest in long-term growth, and not in share buybacks as they did in 2004.

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Millennials don’t save for enough retirement, but Congress can help – Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

From The Hill

“Young people are not saving enough.”

“They will have to double their savings to retire at a reasonable age.”

These quotes represent the conventional wisdom about our nation’s millennials, the more than 80 million Americans between the ages of 20 and 36. However, the savings picture for millennials has become more complex, according to recent data. This cohort of young people is saving more, though for short-term goals instead of retirement.

To promote retirement savings, Congress should pass the Automatic Individual Retirement Account (IRA) Act, legislation that was introduced in the House in 2015, for millennials and other Americans without a retirement plan at their workplace.

Millennials, especially the younger ones, are now building up their savings to cover emergencies for the first time since the financial crisis. More than 30 percent of Americans ages 18 to 26 have saved enough to cover three to five months of living expenses, according to a survey conducted earlier this year by Princeton Survey Research Associates International.

A spokesman for Bankrate.com, the survey’s sponsor, explained, “Millennials have a savings discipline that the preceding generations lacked.” Despite much lower levels of earnings, millennials save on average 19 percent of their annual income, compared to 14 percent for both generation X (those in their late 30s to early 50s) and baby boomers (those in their late 50s to late 60s).

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