Mark Hynes - thoughts on corporate disclosure

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

Thursday, June 28, 2007

Short term guidance:an end in sight?

More interesting news this week from the US in the sphere of short term guidance and short term performance communication. It looks as though this is a subject that will not lie down. Late last year, the Business Roundtable, the Disclosure Advisory Board and the Conference Board separately opined, as did the New York Chamber of Commerce.

Nonetheless, as we wait for the NIRI annual survey of how many public companies are still producing quarterly guidance, the weighty Committee for Economic Development (CED), a business-led policy group produced a report calling voluntary abandonment of the practice.

Emphasis on quarterly earnings, compensation tied to earnings per share, shortened CEO tenures, and financial reports that fail adequately to inform about company performance impede the task of building long-term value” notes the report, which comes with the backing of some serious pension fund money.

Quarterly earnings guidance gained popularity during the dot-com era when investors had little understanding of what those new companies actually did for a living, let alone what their earnings may turn out to be. So the dot-commers started began issuing earnings forecasts. It turned out analysts on both sides of the divide liked this process, and when the boom ended, wanted to continue receiving them from ‘old economy’ stocks.

After all, the cynics say, it's much easier to focus analysis on the company's guidance than on building a financial model which combines past performance with new material disclosures about long term plans to forecast future results.

Another huge constituency that really likes quarterly earnings guidance: hedge funds need volatility, and the market's reactions to ‘penny miss’ results provide opportunities. And “whisper numbers” float around in chat rooms providing more volatility; and companies are expected to issue amended guidance.

However, the pressure is mounting from all sides on companies still producing quarterly guidance. The demand is for investor relations professionals to be allowed to educate the market on long term goals, and achievements along the path to meeting those goals. And this is a process very familiar to companies in Europe.


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