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Integrated reporting in the United States

Posted 10 October, 2018

In August, U.S. President Donald Trump tweeted, “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!”  As one could imagine, the tweet generated a lot of discussion about financial reporting in the U.S.  Businesses have complained that quarterly reporting requires company executives to focus too much on the short term and can force companies to miss out on long term trends.

However, a study by a business professor at Indiana University indicated it is unclear whether management at companies that report semi-annually take a longer-term investment strategy than management at companies reporting quarterly.  The U.S. Securities and Exchange Commission Chairman Jay Clayton responded to President Trump’s tweet in a statement titled Statement on Investing in America for the Long Term that, “The President has highlighted a key consideration for American companies and, importantly, American investors and their families — encouraging long-term investment in our country.  Many investors and market participants share this perspective on the importance of long-term investing. Recently, the SEC has implemented — and continues to consider — a variety of regulatory changes that encourage long-term capital formation while preserving and, in many instances, enhancing key investor protections.”

While there are strongly held beliefs on both sides regarding whether there should be changes to the quarterly reporting requirements in the U.S., almost everyone agrees on the importance of a focus on the long term in financial reporting.  Here in the U.S., Focusing Capital on the Long-term (FCLTGlobal) and the CECP Strategic Investor Initiative are two of our key partners in leading efforts to encourage a longer-term focus in business and investment decision-making.  In addition, the SEC’s Deputy Chief Accountant, Marc Panucci, addressed our global IIRC Council meeting in New York City last year, stressing the focus of the SEC on developing a regulatory platform that promotes objectivity, integrity and long-termism in capital market decision-making, principles very much aligned to the movement towards integrated reporting.

The SEC’s draft strategic plan, published in June, develops these themes further with its focus on, “serving the long-term interests of Main Street investors; becoming more innovative, responsive, and resilient to market developments and trends”.  This statement is supported by Larry Fink, the chief executive of the largest equity investor in the world, BlackRock.  In his annual letter to company CEOs issued in February 2018, for the third year running, he called on companies to lay out their strategy for long-term value creation.

So, the question becomes, what could the SEC consider in order to achieve its goal of encouraging “long-term capital formation while preserving and, in many instances, enhancing key investor protections”.  We at the IIRC believe the SEC should consider a project to reexamine their guidance on Management’s Discussion and Analysis.  It has been 15 years since the last time the SEC issued a significant Financial Reporting Release reexamining their guidance on Management’s Discussion and Analysis.  We can all agree there have been significant changes since 2003 and many believe a multi-capital approach to Management’s Discussion and Analysis could go a long way in serving the long-term interests of Main Street investors.

It is important to note that the International Accounting Standards Board has added a project to its agenda to revise and update its guidance on Management Commentary.  Speaking at the IFRS Foundation Conference in Frankfurt in June 2018, IASB Chairman Hans Hoogervorst said the review, “Will reflect new developments in integrated and sustainability reporting, and particularly the growing interest in long-term value creation.”