Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Wednesday, July 26, 2006

Is best practice on guidance by US companies heading towards a “UK model”?

This week’s well publicised research from a hugely prestigious group led by the CFA, will make encouraging reading for IRO’s on this side of the pond.

9 months of consideration by this US-based group has been given to the issue of short-termism – corporate and investment decision making based on short term earnings expectations, versus long-term value creation for all stakeholders. A cross-functional group of issuers, analysts, institutional fund managers and retail investors have created a series of recommendations.

Top of these is the need to reform earnings guidance practice. This follows research by NIRI reporting on the decline of quarterly earnings guidance. (see blog post May 9th). However as the NIRI research indicates, those who give up provision of quarterly earnings guidance, often increase the quantitative and qualitative information they do provide to assist analysts and investors.

Which has echoes of best practice in the UK. Far sighted mainstream UK companies already take the approach of providing some general guidance on divisions' growth rates, and the specified value drivers (eg volumes, unit revenues, margins) to help the market get close to a reasonable set of numbers through a textual approach, accompanied by conversations about consensus.

This systematic approach to guiding the market on each division, all the while avoiding any individual price sensitive remarks or any discussion of overall company operating profit and eps outlook, will also allow skilled analysts to differentiate themselves.

The real value for in-house IR people here is not in deciding on whether to publish formal eps guidance – which they often cannot sway for their company, but rather in striking the balance between equitable public disclosure of inside/ material information and providing useful non-price sensitive guidance in one-on-one meetings to create as informed a market for their shares as possible.

As the companies in the US wrestle with this issue, they could do a lot worse than to look at this model.

5 Comments:

  • At 7:35 pm, Blogger Dominic Jones said…

    The idea of giving analyst and investors the pieces so they can put the puzzle together themselves is all well and good, but it is discriminatory to private shareholders who might not have the knowledge and expertise to make sense of it. Doesn't management have a responsibility, if it knows what the aggregated picture is, to spell it out?

    I have difficulty accepting that we should discriminate against people based on the fact that they are not finance experts, especially in an era where individuals are being called on to make important decisions about the financial futures independent of expert advice e.g. defined contribution pension plans.

     
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