This article proposes three changes to disclosure rules for public companies that would make a significant difference for investors. The problem with new rules is that they can impose significant costs on companies that are ultimately borne by shareholders. Anyone who proposes new rules should have to consider whether the benefits outweigh the costs. I believe that this test is passed for all three of my ideas.
Earnings Call Transcripts and Recordings
Many public companies hold quarterly earnings calls which are usually accompanied by supplementary information and written presentations. Earnings calls are often useless because the managers simply read out the text of the earnings release, but some managers offer significantly more “color” when discussing results, especially when responding to analyst questions.
It is possible for any investor to listen to earnings calls when they are scheduled and most companies offer recordings of the call for a period of time. However, very few companies file their transcripts, recordings, and supplementary information with the SEC in the form of an 8-K current report. Doing so should be a requirement for all public companies that choose to have earnings calls.
In the past, the cost of transcribing calls could have been a legitimate objection for smaller public companies, but the emergence of transcription services, some using artificial intelligence, has made the cost trivial. Audio recordings of calls should also be submitted to the SEC as exhibits to current reports. Many smaller investors rely on RSS feeds from the SEC’s EDGAR system to keep up with their investments. The filing of a current report with transcript information would appear in RSS feeds.
While there is significant value in having these transcripts available on the EDGAR system in the short run, the greater value will become apparent in the long run. As I have noted in the past, the internet is fragile. Corporate investor relations websites are particularly fragile. I have been writing about investments for over fifteen years and when I look back at my older articles, they almost always have broken links because investor relations sites do not properly maintain their links over time.
It is not uncommon for investor presentations to simply disappear from the internet forever. Since I believe in studying a company for a minimum of a decade, it is often frustrating to not have access to earnings call transcripts when reviewing results for past years. Having such communications archived on EDGAR solves this problem.
Combine Annual Reports and Proxies
Most companies release annual reports on form 10-K a few weeks prior to filing proxy statements disclosing executive and director compensation. The SEC should require concurrent release of both documents as a single integrated filing.
Shareholders who invest the time to study 10-Ks are obviously interested in how the business has performed and this information is fresh in their minds. There is no reason to delay presentation of executive compensation for several weeks after the annual report when it should be disclosed along with annual performance figures.
Proxy statements, with very few exceptions, are virtue-signaling public relations documents that disclose compensation figures in a sea of verbiage, much of which is useless for shareholders who are interested in business performance. It would be easy for companies to incorporate executive pay information into annual reports.
The purpose of a proxy is to solicit votes for the board of directors and proposals put forward by the company or shareholders. If additional matters are submitted for consideration after the 10-K has been filed, amendments to the proxy could always be filed with the SEC at a later date. As things stand today, I believe that the main reason for the separation of 10-K and proxy filings is to release executive compensation data after the period of maximum scrutiny of annual results has passed.
Maintenance vs. Expansion Capex
Net income is often not a good approximation of true underlying economic earnings for a business. For example, in capital intensive businesses with very long lifecycles for physical infrastructure, net income is likely to overstate true economic earnings because depreciation charges are based on historical cost while capital expenditures merely needed to maintain the existing business must be purchased in current dollars.
Information on capital expenditures is found in cash flow statements and often in management’s discussion of results. In many cases, companies disclose information about capital expenditures that allow analysts to determine how much of the capex is needed to maintain the existing business and how much is being used to expand operations. However, such information is often not included in SEC filings. It is common to read about maintenance and expansion capex in presentations or to hear references to this subject in earnings calls.
Even without having a breakdown of expansion and maintenance capex, analysts can often come up with ballpark estimates on their own because it should be apparent when a business is trying to expand. Even so, it would be useful in many situations for management to provide a breakdown. Having a better understanding of capital allocation decisions is one of the most important aspects of analyzing a business. It is important to understand the returns on incremental capital invested in a business. Many managers skilled at operations are not good capital allocators.
Requiring a breakdown of maintenance and expansion capex in financial statement footnotes does not seem like a major burden for public companies to implement. Managers should already have a very clear idea of why they are making investments. If they cannot provide such a breakdown, it is a potential sign of poor capital allocation practices with an insufficient focus on returns on incremental invested capital.
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