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Trump’s desire to scrap quarterly earnings forces Canada to reconsider its own reporting

President Donald Trump has asked the top securities regulator in the United States to consider doing away with quarterly financial reports, re-igniting a debate about the merits of “quarterly capitalism” and forcing Canadian regulators to consider revisiting their own reporting requirements.

In a tweet on Friday morning, Mr. Trump wrote that he asked the U.S. Securities and Exchange Commission to study changing the way in which U.S. companies report their financial results. The request follows conversations Mr. Trump said he had with some business leaders, one of whom said ending quarterly reporting and switching to a six-month system would save money and create more flexibility.

In recent years, a number of prominent business figures, including Unilever chief executive officer Paul Polman, have voiced concerns about the cycle of quarterly reporting, arguing that it promotes too much short-term thinking. Because analysts and investors put so much stock in quarterly results – a trend known as “quarterly capitalism” – the leaders argued that it is harder to make big strategy decisions that could take years to pay off.

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Canadians have been associated with this broad campaign, including Dominic Barton, who ran McKinsey & Co. and was recently named the chancellor of the University of Waterloo, and Mark Wiseman, who ran Canada Pension Plan’s investment arm and who is now a senior executive at BlackRock in New York.

It was revealed later on Friday that outgoing PepsiCo CEO Indra Nooyi made the suggestion to Mr. Trump. In a statement, she said her comments were made in a broader context of promoting longer-term thinking, and that a change would harmonize U.S. requirements with those in Europe, where companies must report only every six months.

Mr. Trump’s comments put Canadian watchdogs in a tough spot. If the United States were to change its own rules, Canada would almost certainly have to follow suit. Most large Canadian companies are listed in New York.

“We would immediately need to follow,” said Walied Soliman, chair of law firm Norton Rose Fulbright Canada. “We can’t be misaligned with the United States on something so fundamental.”

However, only a few months ago, Canada’s provincial watchdogs collectively decided not to change the frequency of financial reports after studying the issue for a year.

In April, 2017, the regulators released a consultation paper on ways to reduce the regulatory burden for Canadian companies. Multiple issues were raised, and the potential to permit semi-annual reporting was included.

This March, the regulators revealed the results, and a number of influential Canadian companies and investors showed support for scrapping quarterly reports, including Suncor Ltd., George Weston Ltd. and the Caisse de dépot et placement du Québec.

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“The Caisse believes that semi-annual reporting should be an option available to all reporting issuers,” the Quebec pension fund wrote in a comment letter. “Such a reduced regulatory requirement would be a fair compromise between protecting investors and reducing reporting costs for issuers.”

However, the majority was not supportive of the proposal. Most commenters argued that quarterly reporting provides investors with timely, consistent disclosure. They also said that it instills discipline and accountability when reporting. Those against a change to a six-month cycle included the Canadian Coalition for Good Governance and Magna International.

In a measured response, Magna acknowledged that short-term strategy plans can be a problem, but the company does not believe eliminating quarterly reports will fix it. Investors tend to buy or sell stocks based on any differences between the earnings that a company reports and the profit that analysts forecast. Magna is worried that reporting less frequently will only amplify any results that fail to meet or beat Street expectations.

However, Magna and others factored Wall Street into their decision making, saying it would not make sense to move out of step with the much larger U.S. market.

On Friday, the Ontario Securities Commission said it continues “to monitor international developments in this area."

Editor’s note: An earlier version of this story misspelled the name of Walied Soliman, chair of law firm Norton Rose Fulbright Canada.
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