Analyst: Stop giving quarterly earnings guidance

Corporations should stop issuing quarterly earnings guidance, Chartered Financial Analysts Institute Senior Policy Analyst Matthew Orsagh said in Boise last week.

That would help companies and stock markets break free of “short-termism” that can hinder long-term performance, he told CFA Society of Idaho members and Boise State University business students Sept. 18.

Leaders of many corporations predict what their company will earn on a per-share basis during the next quarter. Analysts in the 1980s and early ‘90s started requesting the forecasts, and investors quickly learned that surprise results could lead to outsized profits, Orsagh said.
Many companies started “managing for that last penny” per share during the last two weeks of the quarter, he said.
The CFA Institute and several other groups studying market short-termism recommend corporations phase out the practice of issuing quarterly guidance, Orsagh said.
“The corporate culture is trying to ‘make the number,’” he said. “Do they do that by borrowing, fudging the books, or not investing?”
He added: “It’s detrimental to long-term valuation.”
The annual-turnover “churn rate” for shares of New York Stock Exchange-listed companies increased from 10 to 30 percent from 1940 to 1980 to more than 100 percent in 2005, Orsagh said, citing NYSE Fact Book data.
Not all of the Idaho financial analysts liked the idea of phasing out quarterly guidance. One analyst said the guidance can shed light on a factor he may not have considered.
Another asked if eliminating guidance would do much to reduce some analysts’ emphasis on short-term expectations.
Idaho analysts also said some large investors manage for big and fast returns, and that ignoring the short term could lead to middling long-term performance. They said factors in the short-term focus of recent years include executives’ stock-based compensation, and modern analysis tools and computer spreadsheets that encourage analysts to focus on what they can quantify most: current and near-term financials.
Orsagh said the solution is “more information and better information.” As for executives whose pay largely reflects stock gains, restricted stock grants – exercised after a period of years – would help move managers toward longer-term management goals, he said.
He agreed with the idea that doing away with quarterly guidance isn’t popular with everyone. Some small companies have viewed the guidance as giving them a voice through the few analysts that cover them, and companies of all sizes have indicated that suddenly dropping guidance would tell investors that something is wrong, or that they are hiding something, he said.
“CFA members say we want the information that comes with it, not the guidance,” Orsagh said.
Companies with strategic needs for providing earnings guidance should adopt practices that incorporate a consistent format, range estimates, and metrics that reflect long-term goals and strategies, he said.
When the CFA Institute and other groups began studying short-termism a couple years ago, they first blamed hedge funds before determining that corporations, institutional investors, asset managers and others play roles, Orsagh said.
More companies are decreasing quarterly guidance, he said. Large companies can help lead further such moves, he said.
Companies should improve communications and “transparency,” and CFA Institute members should help educate all market participants about the benefits of long-term thinking and the costs of short-term thinking, Orsagh said.
Groups studying short-term market trends include the Virginia-based CFA Institute’s Business Roundtable Institute for Corporate Ethics, the National Investor Relations Institute, the U.S. Chamber of Commerce, The McKinsey Quarterly, economists who produced “The Economic Implications of Corporate Financial Reporting,” The Conference Board, the Marathon Club, the Committee for Economic Development and The Aspen Institute.
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