Earnings guidance: The real issue
By Sam Silvers

Spencer Stuart / DirectorS & Boar DS Director S r oSter T here is a long-running argu- ment about whether or not co m p a n i e s s h o u l d p rov i d e earnings guidance. The media has produced an endless string of ar- ticles and opinion columns. Academics have churned out study after study. And corporate executives have debated the issue until they were blue in the face. But in our view, all of these arguments focus on the wrong question. The real issue is how to get analysts and investors to see your future pros- pects the same way you do — to believe in your company’s “story.” In this broad- er context, quarterly earnings projec- tions are little more than a footnote. Ye t co m p a n i e s a ro u n d t h e w o r l d c o n t i n u e t o w a s t e c o u n t l e s s m a n - hours agonizing over their ear ning s numbers as if they are all that matters. Sure, earnings are important. But they are only part of the story (and not nec- essarily the most compelling part). In many cases, companies might be better off with a more balanced approach that doesn’t revolve entirely around earn- ings per share. In recent years, there has been a slow but steady trend away from giving earn- ings guidance. Deloitte recently con- ducted research to see how some of the world’s most profitable companies pro- vide market guidance without relying solely on projecting earnings per share. The study revealed three additional an- gles a company might choose to high- light when telling its story: • Strateg ic Initiatives. A number of these companies tell their story by focus- c ompetitive eDge Earnings guidance: The real issue The current debate focuses on the wrong question. By Sam SilverS anD WenDy Huang Sam Silvers is a principal of Deloitte Consult- ing LLP and leads its Financial Management Consulting Practice (www.deloitte.com). Wendy Huang is a senior manager in the firm’s Strategy & Operations Practice. Industry leading Investigative Due Diligence and FCPA Risk Mitigation. What you don’t know, most certainly can hurt you. Manage with insight. d a y l i g h t f o r e n s i c . c o m New York washiNgtoN MiaMi LoNdoN ©2007 Daylight Forensic & Advisory LLC. FCPa anti-MOneY LaUnDeRing enhanCeD DUe DiLigenCe FORensiC aCCOUnting RegULatORY COMPLianCe & inVestigatiOns second quarter 2008 15 Continued on page 17 Spencer Stuart / DirectorS & Boar DS Director S r oSter ing on their overall strategy and the key initiatives that support it, which helps them gain the market’s confidence. If investors and analysts find the story and strategy compelling, management can provide guidance simply by show ing that the strategic initiatives are on track. A number of leading financial institu- tions use this as their primary approach to guidance. One insurer even goes so far as to produce a separate supplemental disclosure that describes the progress the company is making against its strategic initiatives. • “Big Picture” Trends. Other compa- nies tell their story by linking the com- pany’s prospects to larger trends such as macro-economic factors and demo- graphic shifts. If analysts and investors buy into the company’s overall strat- egy — and how it relates to the larger trends — they are likely to remain on board as long as the trends continue to unfold as expected. A leading Internet company relies on this technique as its primar y approach to providing guid- ance. As long as Internet usage contin- ues to expand in size and scope, inves- tors and analysts are likely to maintain their rosy view of the company’s mar- ket value and future prospects. Other companies use a similar approach, but hitch their fortunes to trends such as interest rates, energy prices, and immi- gration patterns. • Management Confidence and Trust. Some companies have such a strong track record of meeting or exceeding investor expectations that the market is willing to accept their story more or less on faith. Many of the world’s most respected companies fall into this categor y. For example, one highly profitable invest- ment banking firm provides investors and analysts with very little guidance or insight into its business, preferring to let the firm’s performance speak for itself. Establishing this level of confidence and trust isn’t easy; however, companies that have achieved it should definitely use it to their advantage. A similar technique is to showcase a team of senior executives responsible for a region or market seg- ment that is particularly critical to the company’s profitability. Boards should be taking a cr itical look at how the company is telling its overall story. Is management using all of the techniques at its disposal? Or is it fixating on quarterly earnings? Choos- ing the right approach — or mix of ap- proaches — can have a significant im- pact on market value. It can also allow company executives and staff to focus more attention on managing the busi- ness, instead of wasting their time fuss- ing with the numbers. ■ The authors can be contacted at ssilvers@ deloitte.com and wendyhuang@deloitte.com. Steven Ehrenhalt of Deloitte Consulting con- tributed to the development of this column. D O Y O U K N O W T H E R U L E S ? G O T O D I L E N S C H N E I D E R P O W E R . C O M T O F I N D O U T. “These rules from a MASTER OF THE POWER GAMEwill change your career—and maybe your life.” —Maria Bartiromo, Anchor, “The Closing Bell with Maria Bartiromo” “This book is anIMPORTANT READfor all.” —Henry Kaufman, President, Kaufman and Co., author of One Money and Markets, A Wall Street Memoir Available everywhere books are sold. MHPROFESSIONAL.COM c ompetitive eDge second quarter 2008 17 Earnings guidance Continued from page 15

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