Mark Hynes - thoughts on corporate disclosure

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

Thursday, March 08, 2007

At cross purposes on TV – we needed “guidance”.

When a business TV station takes an interest in a subject normally reserved for debate among IRO’s, you sit up and take notice. So it is this week with “guidance”.

Wikipedia, the encyclopedia says “guidance is a publicly traded corporation's official prediction of its own near-future profit or loss, stated as an amount of money per share. Guidance is usually given in a quarterly report to forecast the corporation's performance in the next quarter. Guidance is an aid to financial analysts and the stock market in valuing the corporation, and helps prevent overvaluation.”

Last Tuesday March 6th ,CNBC invited Dean W. Krehmeyer the Executive Director of the Business Roundtable Institute for Corporate Ethics and me to discuss the issue live on air.

This is against a background of new research coming shortly from the US Chambers of Commerce, and earlier work from the Business Roundtable, National Bureau of Economic Research, CFA Institute, McKinsey and others. Most of these researchers conclude that “guidance” is a BAD THING – with huge consequences for the share price, management focus and all the rest of it.

However, there is a dissenting voice. The Disclosure Advisory Board – which I chair – believes that guidance should be modified, not banned. The arguments go like this.

Guidance is not an on/off switch. One size of guidance does not fit all. Every public company has to fit its communications strategy to its own needs, and not be bullied into thinking that short term guidance is always “bad”. For most companies, communicating a longer term picture of goals, strategies, acquisitions, business sector and geographic metrics, is essential – and probably a legal obligation.

The Board believes that this is the new guidance; helping skilled analysts reach their own conclusions and valuations of the business. This will allow analysts with particular insight and understanding to distinguish themselves from their peers, and hence be more effective for their clients.

The Board also believes that this longer term guidance lies at the heart of the IRO’s skills; building a picture and providing progress reports against that picture will guide analysts to a fair valuation, WITHOUT creating the negative consequences so feared by the distinguished researching organisations.

It is also worth noting that for some companies short term guidance absolutely WILL be appropriate. Newer companies, the (unfortunately) growing list of companies with no analyst coverage, and even for companies lacking liquidity, seeking a better mix of short and long term investors, providing short term guidance offers a solution.

So please join our campaign – Redefining Guidance. Lets start with a changed Wiki – and maybe the next TV interview will record the transformation in the market’s understanding of public companies businesses.


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