Directors & Boards: Question of the Month

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Question of the Month

Should Companies End the Practice of Giving Earnings Guidance?

Yes

“Guidance puts too much pressure on management to meet their "target," which adds to short-term thinking, and at least "stretching" on accounting.”

“There is excessive focus on short-term results which is exacerbated by quarterly reporting and regular earnings forecasts. Equity investment should remain a long term issue.”

“The practice makes companies slaves to the market. It encourages a short-term focus that can be detrimental to the long-term health of the business. It has also, in my opinion, driven the kind of creative accounting that has gotten many companies into trouble over the past few years.”

“Companies (and the Street) need to focus on the long-term. It's time to do away with this TV hype-induced game. Company earnings should not be treated as point spreads. Companies should be providing only long-term expectations for their markets, costs, production, etc. It's about time that the analysts and investors did the homework.”

“Continual focus on the short term drives possible bad decisions (i.e., not investing in new products to ensure that we gain the last one penny to meet guidance earnings.)”

“There is too much liability involved in projecting and updating guidance and statements relating thereto; companies should run their businesses as they see fit and not be beholden to arbitrary expectations of ‘analysts’ or whoever ‘the market’ truly represents. Quarterly or annual pressures to hit targets (for reasons of market expectations or bonuses) can tempt some to ‘massage’ earnings or abandon long term, strategically meaningful projects (i.e., reduce capex) in order to achieve short term earnings targets.”

No

“Internal projections are based on budgets that should, by their nature, include stretch objectives. Without those stretch objectives, and the risk that goes with them, companies are not pushing for the performance shareholders deserve.”

“If a company can't get its act together well enough to make a credible forecast, they are not a good investment. Guidance adds some element of predictability, without which the stock deserves a higher risk discount.”

“In this market, given the power of the analysts' estimates, it is the best way to deal with having realistic expectations. Giving guidance is by nature an open and transparent process and, I believe, consistent with treating your shareholders like the owners of the company -- you're telling them where you think you can take things, which gives them a benchmark to evaluate management against and to compare alternative investments.”

“The real concern is the impact market analysts have on management’s decisions on how they run the business. Management is expected to have a firm handle in projecting earnings and should be compelled to do so regardless of the resulting interpretation analysts read into the disclosure.”

“The market has come to use the interpretation and understanding of analysts relative to actual results as a means of valuation, rather than the real delta between a company's expectations and company’s performance. As it is unreasonable to expect a meaningful or valuable diagnosis based on tangential symptoms, directors have an obligation to reduce the misinformation distributed about their company by removing the underlying (misunderstood) data. It is time to stop fighting the market.”

“CEOs can stop giving guidance when boards stop firing them for not delivering share price appreciation. There is no doubt that analysts reward companies that give guidance with higher valuations. And after 404, it is no longer true that companies have the ability to manage earnings -- the argument for why the investors should run for the door when a company misses by a penny. The real culprit is the short-term attention span of the investors, which punishes companies for missing expectations, even though they’re profitable, leading to boards to fire management (the only lever they can pull to "fix" the company), leading to managers who will do anything to avoid reporting a miss. Reward longer-term investment philosophies. Let investors share in company profitability without having to sell their shares (don't double-tax dividends).”