Companies have long struggled with – do we, or do we not provide guidance. Throughout the 1990’s and early 2000’s, forecasts were a central aspect of share analysis and investor communications. However critics have long maintained that quarterly EPS forecasts support an unhealthy emphasis on short-term results rather than long-term value. Certainly, valid arguments can be made on both sides of the issue, but we believe that corporate management might do well to visit or re-visit the advisability of providing quarterly earnings guidance – and whether in the long term it best serves their company and stakeholders.
Warren Buffet for one has long been a strong proponent of not providing guidance. In his year 2000 Letter to Shareholders of Berkshire Hathaway, he looked to make his case (or maybe warned us, given events that have followed) stating: “The problem arising from lofty predictions is not just that they spread unwarranted optimism. Even more troublesome is the fact that they corrode CEO behavior….. I have observed many instances in which CEOs engaged in uneconomic operating maneuvers so that they could meet earnings targets they had announced. Worse still, after exhausting all that operating acrobatics would do, they sometimes played a wide variety of accounting games to ‘make the numbers.’ These accounting shenanigans have a way of snowballing: Once a company moves earnings from one period to another, operating shortfalls that occur thereafter require it to engage in further accounting maneuvers that must be even more ‘heroic.’ These can turn fudging into fraud…”
Having worked with publicly traded companies for many years, I have also seen the focus that some companies place on meeting forecasted numbers in line with their analyst consensus. Given this, is it any wonder that some CEOs and CFOs (focused on the short-term) spend a lot of time (that might better be spent in building long-term value) to ensure they make a forecasted target. We have all witnessed a share price drop when a company misses its target, sometimes by no more than a penny or two?
Beyond this, according to a study by Harvard Business School it would appear at least some corporate executives feet have been held to the fire on making those quarterly numbers by their board of directors. The study found that CEOs and CFOs who missed their targets were more likely to be punished with lower bonuses, smaller equity grants – and potential dismissal. In other words, it would appear that some executives are being incentivized to make their quarterly numbers.
Are companies and investors best served by such short-term views? I think not, and would suggest rather that companies and investors would be better served by management’s communicating their focus on growing their company’s value over the long term. Providing a strategic plan and identifying and discussing in detail long-term value drivers for the company on a consistent basis will help to attract long-term investors as opposed to short-term investors or traders. After all, shouldn’t a company be judged on its steady performance and not one quarter’s?
Marilynn Meek is a Vice President at Financial Relations Board and brings over two decades of experience as an officer of Wall Street securities firms and IR agencies. She provides strategic communications programs that include IPOs, M&As, capital raising initiatives, shareholder and analyst communications, and financial crisis communications for micro-cap to Fortune 500 companies.