Monday, March 13, 2006

Stop The Quarterly Earnings Guidance Already!



More and more big listed companies in America are revolting on the practice of providing quarterly earnings guidance (QEG). In other words, providing company forecasts. Needless to say, this kind of short term managing will result in a very difficult operating environment. Long term objectives and strategy will be compromised to attain short term goals and targets. QEG will not just affect the top layer of management, but will work itself down to the nuts and bolts of every organization, especially sales and marketing. Constantly doing, re-doing, re-working, re-stating QEGs will create a damaging focus on meaningless short-term performance and undermine a company's ability to manage for the long term. This re-working, re-stating, re-doing will have to be re-communicated down the line re-peatedly. Re-diculous!

Even I am concerned for quarterly reporting as I do feel there is an excessive burden on the board and senior management to do board papers, attend board meetings just to ratify and spot "typos" - a lot of constructive hours are lost. If we can maintain quarterly reporting to the bare minimum with no "special announcements or guidance" necessary... it will save a lot of people a lot of time, money and creative energy. Companies want to project numbers that will please Wall Street, their shareholders, the bloggers and excessive business programs on television. All company executives, especially those of large public companies, should follow the lead of others who have stopped issuing earnings guidance. Even stock analysts are disenchanted with QEGs as they have write, comment on trivial things on a too-regular basis.

Berkshire Hathaway Inc chief executive Warren Buffett said Wall Street's relentless focus on whether companies hit or miss quarterly earnings targets encourages balance-sheet manipulation and discourages long-range planning. A consensus is growing among CEOs, regulators and analysts to go against QEGs. Many CEOs despise giving such guidance but are afraid to stop because they think they would be punished by Wall Street analysts and shareholders.

Among the biggies who have stopped giving QEGs are Citigroup, General Motors, Ford, Motorola and Intel. Last Friday saw another big boy joining this elite group, Pfizer. Even Merrill Lynch has recommended its global research analysts to discount company guidance when preparing forecasts.

Many companies want to stop, maybe part of the reason is that more and more companies have been missing their numbers. Particularly if you have had a great quarter, what are you going to forecast for the next quarter? If you are less than optimistic, then even that great quarter's results will be villified and your stock will be graded down by analysts and business journalists. If you maintain an optimistic forecast, you are just raising the bar every quarter - how often can you raise the bar. Not everyone has a "General Electric" at his disposal - not that I am bashing GE, GE has been famous for not missing QEGs. When you have a fantastically run company with super achieving executives, and most importantly, an array of business units - you can "manage" earnings well. Tweaking business units performance on a quarterly basis, recording some sales early and some late - well, wouldn't it be easy, especially when you have so many well run units in GE.

CEOs have another quibble about QEGs and that is the increasing focus of class-action shareholder lawsuits. It is too short term in nature and volatile, and if CEOs are held liable for QEGs on a strict basis, it will be too stressful, if it isn't already.

As in any markets, the top companies get too much research coverage while the rest get zilch. Two-thirds of Nasdaq companies are covered by one or no analysts. Small companies then feel obligated to play the QEG game simply to get attention. The one group who seem to benefit more from QEGs are the hedge funds, as they can have more opportunities to go long/short a stock/industry class based on QEGs. Hedge funds also tend to be more severe in rewarding and punishing short term happenings. End result, more volatility.

When QEGs were first proposed, it was based on the premise that they would help lessen volatility, and hence risk and cost of capital would also decrease. It should lead to better information flow and access for shareholders and potential investors. Boy, I think everyone should admit they were mostly wrong here.

2 comments:

DanielXX said...

I guess your arguments might be more applicable for the US market, where information efficiency is already high as it is, and where management can be sued for all kinds of liabilities. In Asia, surely quarterly reporting would enhance transparency, in a culture where owners/substantial shareholders tend to treat the listed company as their personal fiefdom to the detriment of minority shareholders.

Salvatore_Dali said...

Agreed DanielXX, what I am suggesting is stop the guidance, not the quarterly reporting. We still need the quarterly reporting, just that in the US you have CFOs and CEOs coming out every quarter, when they announce their results, they are supposed to indicate and guide projected earnings for next quarter and so on. That is just too self-defeating. You get grilled and whacked for no reason. Volatility is increased for no reason.