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Giving Guidance: Stop the Game?
Earnings season always raises the curtain on this kabuki dance of meeting analysts’ estimates.

Earnings season is in full swing. Or, I should say silly season -- when companies can report double-digit earnings increases and be rewarded with double-digit hits to their stock price.

We’re going to give you a chance in our “question of the month” below to express an opinion on the advisability of earnings guidance. But first a few observations.

In my younger days as a business reporter, I never quite fathomed how a company could miss analysts’ estimates by a penny and see its stock price shellacked. What was the big deal with this almighty penny that it could cost a company millions if not billions in market capitalization? Wasn’t an analyst forecast little more than crystal ball gazing? Last I checked, fortune tellers never had a whole lot of credibility.

It took me a while to learn what a kabuki dance this game of meeting expectations is. As it was explained to me, the way companies play fast and loose with accounting reserves in configuring earnings “guidance,” if management can’t come up with a penny to plug in an expectations gap, then the wheels really must be coming off the enterprise. Bombs away, and a race for the exit.

To challenge this culture of quarter-to-quarter short-term thinking, the U.S. Chamber of Commerce is recommending that CEOs cease and desist giving earnings guidance. “Earnings projections are a fool’s game for management,” says Chamber President Thomas J. Donohue.

He’s not a lone voice to go public in a big way on this debatable practice. A corporate director I greatly admire, Raymond Troubh, had this to say at the Council of Institutional Investors fall meeting: “My own view is that corporations should never give earnings guidance; once you get on that bandwagon you can never get off with grace -- only with a hit to your share price.” (For more of Troubh’s candid commentary on governing in an era of reform, see his article, “What It Now Means to ‘Direct,’” in the just-published First Quarter issue of Directors & Boards.)

There is no debate about how bullish the e-Briefing readership is. Last month we asked how you saw the major market averages finishing in 2006. Most directors are upbeat. No one thought the markets would decline, and a minority felt the markets would be flat:

Strongly Up (5% or more): 51.3%
Modest Gain (3-4%): 32% 
Flat (0-2%): 16.7%

Select comments:

“The market will be up 5% or more supported by continuing momentum from the tax cuts, increasing business investments, and solid growth in corporate earnings. The only negative is an out-of-control Fed, which can crater the economy chasing nonexistent inflation with interest rate hikes.”

“The Fed stops raising rates. GDP growth remains acceptable. U.S. involvement in Iraq declines.”

“The winners in 2006 will be those select companies that reward stockholders and keep a fixed eye on improving key ratio performance and corporate stewardship.”

That last comment about keeping a fixed eye on the right things is a good one to transition to this month’s question:

Should companies end the practice of giving earnings guidance?

Click here to take the survey

Jim Kristie is the editor and associate publisher of  Directors & Boards.

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Institutional Investors: Think for Yourselves

By Ira M. Millstein

Corporate governance systems have a distinct “balance of power” and set of tradeoffs among shareholders, boards, and managers. In some jurisdictions, the power tilts to the managers, but in other jurisdictions it tilts to the shareholders. It may not be a dramatic imbalance, but even a tipping of the scales makes a difference.

Where the balance of power lies impacts how specific laws and regulations deal with the agency problems arising from the corporate form. No work has demonstrated this better than the treatise, The Anatomy of Corporate Law (Oxford University Press, 2004), authored by seven outstanding, internationally well-known and respected academics.

The Anatomy demonstrates that management is the most powerful corporate constituency in the U.S. This balance of power plays out in a variety of laws and regulations that are relatively unfriendly to shareholder interests -- for example, laws and regulations relating to the shareholder meeting, voting on selection and removal of directors, consultation and proxy solicitation, takeover defense, and executive compensation.

The authors of The Anatomy correctly conclude that in the U.S. managerial dominance of the system probably started and continued because things were going well for the economy and corporate America. They note that shareholders have little incentive to exercise their latent legal powers during periods of prosperity and rapidly rising share prices because it would appear their interests are being looked after.
  
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Every Board Faces a Choice

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Editor's note:  Each month, we ask a Directors & Boards reader to comment on critical issues facing directors today.  If you'd like to participate in this section in the future, please email Scott Chase. 

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February 15-17, 2006
The Director's Consortium, a joint initiative of the University of Chicago Graduate School of Business, Stanford Law School, and the Wharton School of the University of Pennsylvania, will conduct a three-day intensive program exploring the fundamentals of corporate governance and board service. Leading faculty from the three institutions will present a comprehensive approach to the complex decisions that board members must make. The program will be held at the Wharton School. For information, visit http://www.directorsconsortium.net

February 20-22, 2006
"The Business of Growth: Mission, Message and Measures" is the theme of the 2006 AMA Nonprofit Marketing Conference, presented in partnership with the American Marketing Association Foundation. Designed for nonprofit directors and senior development professionals, the program will address how to maintain and grow an organization in an environment of enormous competition for donor dollars, time, and attention. It will be held in San Diego. For more information, call 1-800-AMA-1150 or visit http://www.marketingpower.com/nonprofit.

February 26-March 1, 2006
"Making Corporate Boards More Effective" is the topic of a Harvard Business School educational program being held for West Coast directors. The sessions will concentrate on cutting-edge techniques, strategies and action plans for improving board design, maximizing individual contributions to company boards, and enhancing corporate performance. Prof. Jay Lorsch is faculty chair for the program. The new West Coast offering will be held at the Estancia La Jolla Hotel & Spa in La Jolla, CA. For information, call 1-800-HBS-5577, ext. 7226, or visit http://www.exed.hbs.edu

March 15-17, 2006
The Directors' Education Institute at Duke University holds its 5th annual session. Under the program direction of Stephen Wallenstein, executive director of the Duke Global Capital Markets Center, the two-day event will examine topical issues and emerging best practices in governance. Keynote addresses will be delivered by Kenneth D. Lewis, chairman, CEO and president of Bank of America Corp., and the Hon. Leo E. Strine Jr., vice chancellor of the Delaware Court of Chancery. Breakout sessions will include "Assessing Business Risks," "Protecting Yourself as a Director," "CEO Selection and Succession Planning," and "Promoting Effective Communication Among Directors and Management." For more information, visit http://www.DukeDEI.org

March 22-23, 2006
Fortune Magazine convenes its "2006 Boardroom Forum" in New York, bringing together board members, regulators, and industry experts for a top-level view of the most important issues and developments in governance. The Forum is moderated by Fortune Senior Editor at Large Geoff Colvin. A second Forum will be held in Chicago on June 22-23. Visit http://www.fortuneboardroom.com to register.

March 27-29, 2006
Outstanding Directors Institute, in partnership with Columbia Business School Executive Education, presents "Outstanding Directors Exchange ODX 2006: A Dialogue with Today's Most Respected Directors." It will be held at the Ritz Carlton Battery Park in New York City. Highlights include presentations by Charles Schwab, Tyco's Edward Breen, and Richard C. Breeden, corporate monitor for WorldCom. For more information, visit http://www.outstandingdirectors.com

March 29-31, 2006
The Council of Institutional Investors will hold its 2006 Spring Meeting, themed "New Environment, New Faces," in Washington, D.C. SEC Chairman Christopher Cox will brief the organization on the agency's priorities for 2006. Among the programming scheduled are sessions on "Hedge Funds Discuss Activism," "Washington Insiders Forecast the New Challenges to SOX-Related Regulations," and "How the Private Sector Is Contributing to the New Environment." For more information, contact the Council at 202-822-0800, or visit http://www.cii.org

May 31-June 2, 2006
"Marketing for Senior Executives", which is taking place on the Harvard Business School campus, was developed by Professors Gail McGovern and John Quelch, and focuses on the importance of elevating certain aspects of the marketing discipline to the executive level, while bringing the customer into the boardroom and helping top leaders to reconnect with this crucial business asset. Participants will return to their organizations with the innovative insights and hands-on-tools needed to help sustain and grow their business. For more information and an application, please call 1-800-HBS-5577, ext. 7226, or visit us at: http://www.exed.hbs.edu/redirects/mfsedbep/index.html

June 1-2, 2006
The Yale CEO Leadership Summit will be held on the Yale University campus. The theme for this semiannual gathering of top executives is "CEO Intervention: Modeling vs. Accountability; Meddling vs. Actions." Under the direction of Prof. Jeffrey Sonnenfeld, senior associate dean of executive programs and CEO of the Yale Chief Executive Leadership Institute, the program brings together CEOs and other business and market leaders for peer-driven educational discussions. For more information, visit http://www.ceoleadership.com

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Boardroom Briefing:  CEO and Executive Compensation
Directors & Boards' lastest Boardroom Briefing, on CEO and Executive Compensation, is now in the mail. You can download a pdf copy of the entire report here.

Our next Boardroom Briefing will cover the topic of Business Continuity and Disaster Recovery Planning.  If you haven't completed your survey (emailed to you last week) on this topic, we encourage you to do so now.  Simply click this link.  Thanks.


National Association Of Corporate Directors Elects Hallagan Chairman
The National Association of Corporate Directors (NACD) elected Robert E. Hallagan, board member of ResCare, Inc. and Berkshire Life Insurance Company, Chairman of NACD Board of Directors, effective January 1, 2006. Hallagan, a native of Boston, also is a member of the Massachusetts Business Roundtable.

Hallagan, an NACD board member since 1996, succeeds B. Kenneth West, who retired from the NACD’s top elected position December 31, 2005. West will remain a member of the NACD Board of Directors.

In 1996, Hallagan co-founded NACD’s research center called The Center for Board Leadership. He has since served as Chairman of The Center where he oversees its mission to develop best practices for effective board leadership. Through a series of independent surveys and Blue Ribbon Commission Reports, the Center annually provides recommendations on topics such as board evaluations, executive compensation, strategy and succession planning.

Hallagan is currently Vice Chairman and member of the Office of the Chairman of Heidrick & Struggles International, Inc., where he served as CEO from 1991 to 1997. He joined the firm in 1977.  Before joining Heidrick, Hallagan also had a distinguished career in financial services. He was Executive Vice President of the Boston Stock Exchange and Executive Vice President and Chief Financial Officer of Hawthorne Securities. He holds an MBA from Harvard Business School and a bachelor's degree in economics from Williams College.

Article Archive Expands
Fifty-five new articles have been added to the hundreds of articles in the Directors & Boards Articles Archive. All of the 2005 editions are now archived, along with the First Quarter 2006 issue. The archive is an important resource for governance research.

Feel free to browse the archives by clicking this link.


Guide to the New Compensation Disclosure Rules
Compensation consulting firm Steven Hall & Partners has prepared a detailed summary of the the Securities and Exchange Commission’s new proxy disclosure rules on executive and director compensation. “We believe the new rules are timely and will be welcomed by CEOs and directors who have been unfairly tarnished as a group by the media and activists due to actions by a small minority,” says Pearl Meyer, senior managing director of the firm (http://shallpartners.com). Click here for a .pdf copy of the summary.


Governance and the Cost of Debt
Many directors have long believed that good governance practices at companies are associated with lower borrowing costs. To test that thesis, GovernanceMetrics International asked two academics from MIT and the University of Wisconsin to examine whether GMI’s governance ratings were correlated to S&P’s credit ratings of U.S. corporations, and, whether independently of the credit rating, GMI’s scores were correlated with cost of capital. “We are encouraged by the results” of that analysis, says Gavin Anderson, president and CEO of the governance rating firm (http://gmiratings.com). Click here for a copy of the white paper.


Major Expansion of Global Proxy Research
Proxy Governance Inc. (http://www.proxygovernance.com), an independent provider of proxy analysis, automated global voting, and U.S. compliance services, has expanded the scope of its services for the 2006 proxy season to include full coverage of corporations in the European, Australian, and New Zealand markets through an alliance with U.K.-based Manifest Information Services Ltd. Manifest formerly was the international partner of Investor Responsibility Research Center. Proxy Governance is also expanding coverage of corporations based in Japan through an alliance with Tokyo-based General Solutions Inc. Proxy Governance President James P. Melican says the expanded coverage “further enhances our position as the only proxy service providing research from a range of independent sources of proxy analysis, reflecting multiple perspectives. This capability distinguishes Proxy Governance from our competitors, whose in-house approach to research is based on a single point of view applied to all situations.”
 

Managing CEO Transition in Venture-Backed Companies
Noted venture capitalist Pascal Levensohn has prepared a white paper on "Rites of Passage: Managing CEO Transition in Venture-Backed Technology Companies." The paper directly addresses a sensitive topic that, Levensohn says, many VCs and entrepreneurs consider "off-limits for discussion in public forums because it delves into what some of my fellow VCs like to call the ‘sausage making’ of venture capital.” This is his second white paper on best practices in VC board governance. His first was "After the Term Sheet: How Boards Influence the Success or Failure of Venture Backed Technology Companies," co-authored with Dr. Dennis Jaffe and released in October 2003 (an excerpt, “Ten Common Pitfalls of Venture Boards,” appeared in the Spring 2004 issue of Directors & Boards). Levensohn is managing director of Levensohn Venture Partners LLC, based in San Francisco. The white paper can be downloaded from the firm’s Web site, http://www.levp.com/news.


Investor Relations/Governance Expert Retires
Louis M. Thompson Jr. is retiring as president and CEO of the National Investor Relations Institute (http://www.niri.org). He has held those positions since 1982. He is a nationally recognized expert in corporate disclosure and governance, and a longtime advocate of the investor relations officer's role with corporate boards of directors. "Lou Thompson will long be remembered not only for leading NIRI through a period of unprecedented growth, but also for profoundly influencing the practice of investor relations," says NIRI Chairman Mary Dunbar. She adds, "During more than two decades at NIRI's helm, Lou helped pioneer the concept of strategic integrated corporate communication, and tirelessly promoted the use of nonfinancial performance measures as a means of providing investors with a more comprehensive valuation picture of public companies.” Thompson authored NIRI's Standards of Practice for Investor Relations, and wrote extensively for publications, including Directors & Boards, on investor relations, governance, and regulatory issues. He is planning to launch a second career in the investor relations profession and will be exploring consulting and board opportunities.


Governance Blogs
Blogs are popping up all over, and Directors & Boards authors are catching this wave of digital communications. In conjunction with the publication of his new book, Corporate Canaries: Avoiding Business Disasters with a Coalminer’s Secrets, Directors & Boards columnist Gary Sutton launched a blog commenting on business developments (http://blog.coughingcanaries.com). Sutton has been a CEO and director of a number of private and public companies in his career as a specialist in startups and turnarounds. And venture capitalist Pascal Levensohn (see News item above) has a blog at http://www.pascalsview.com, in which he summarizes his “Rites of Passage” white paper along with other commentaries that address a particular interest of his, which is “sharing personal insights about multicultural and interfaith issues.” He is an advocate of religious pluralism and mutual tolerance between Jews, Muslims, and Christians.