Investor-Corporate Engagement | Report – 23 October 2017
Moving Beyond Quarterly Guidance: A Relic of the Past
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Since 2005, research has consistently found that the vast majority of corporate executives think that short-term pressure is growing, that it is changing their business decisions, and that those changes are destroying value. One effective way that corporations are combating this phenomenon is by moving away from quarterly earnings per share (EPS) guidance and instead providing investors with a long-term road map focused on the fundamental economic drivers of the business tied to management’s outlook on critical key performance indicators (KPIs).
Since 2005, research has consistently found that the vast majority of corporate executives think that short-term pressure is growing, that it is changing their business decisions, and that those changes are destroying value. One effective way that corporations are combating this phenomenon is by moving away from quarterly earnings per share (EPS) guidance and instead providing investors with a long-term road map focused on the fundamental economic drivers of the business tied to management’s outlook on critical key performance indicators (KPIs).
As we highlighted in our 2015 guide for restructuring the investor corporate dialogue, Straight Talk for the Long Term, quarterly EPS guidance constitutes a critical channel through which short-termism impacts companies and capital markets. By harnessing management teams to self-imposed short-term targets, quarterly guidance ensures that both investors and companies will focus on this time horizon.
It is critical to distinguish quarterly guidance, which relies on forecasts issued by companies to influence market expectations, from quarterly reporting, the retrospective reporting of factual performance, and consensus estimates, external analysts’ forecasts of earnings performance. Quarterly reporting remains essential in providing investors with the transparency they need and in keeping management teams accountable for their performance. On the other hand, consensus earnings estimates will continue to be a feature of markets regardless of what companies choose to disclose. If companies do not issue guidance, a mismatch between reported earnings and consensus indicates an inaccurate forecast rather than an earnings “miss.” This paper is aimed not at reporting or consensus estimates, but at the issuance of quarterly earnings guidance alone.
Indeed, there is mounting evidence that companies that play this quarterly guidance game ultimately suffer. Their focus on short-term metrics often leads them to prioritize decisions that will yield the most attractive results on a quarterly basis and neglect their long-term strategies. Such an approach results in companies, sacrificing valuable investment opportunities and erodes the foundation of long-term, stable shareholders on which they depend.
A recent Harvard study helped confirm what many have long suspected, that companies get the investors they deserve. Focusing on short-term metrics attracts transient, short-term shareholders, compared to peers who issue guidance with a long-term orientation. The inverse holds true as well: long-term companies can attract the right investors. Companies that choose to offer shareholders a long-term vision and strategy benefit not only from a reduced focus on short-term metrics but also by attracting and building a long-term investor base. This virtuous cycle – in which companies that focus on the long-term attract investors who support their longer horizons – is within the power of management teams to achieve.
1 August 2018 - Each stakeholder along the investment value chain must play a role in shifting to longer-term decision making. Today’s investment community, in large part, has become fixated on hitting immediate goals, losing sight of savers’ broader objectives in the process. An effective way for both companies and investors to correct this imbalance is to avoid short-term dialogue, including practices like offering and evaluating quarterly earnings guidance, and instead center their dialogue on strategies that build support for long-term growth.
Building on our earlier work on the investor-corporate dialogue, FCLTGlobal...
25 October 2018 - We are exploring the most effective ways for corporations to communicate their long-term plan and prospects to the investment community.
7 June 2018 - Buffett, who runs Berkshire Hathaway (BRK-B), and Dimon, JPMorgan Chase & Co.’s (JPM) chief executive officer, said in a joint Wall Street Journal editorial that they are encouraging all public companies to consider moving away the practice, arguing that it can stifle long-term investments.
“Quarterly earnings guidance often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability,” they said.
24 October 2017 - Boston, MA, October 24, 2017– FCLTGlobal, a not-for-profit organization that works to encourage a longer-term focus in business and investment decision-making, today published a report, Moving Beyond Quarterly Guidance: A Relic of the Past, calling into question the need for quarterly guidance to shareholders and investors. The report debunks long-held industry misconceptions about the importance of short-term earnings guidance, and argues that companies and investors should move away from this practice.
Key findings from the report show:
Providing quarterly forward earnings guidance (as distinct from quarterly reporting) is increasingly on a downward...
14 April 2020 - With a growing list of companies suspending earnings guidance, FCLT Global CEO Sarah Keohane Williamson explains why quarterly guidance can be problematic.
