According to the FT,
An unprecedented coalition of large companies, pension funds, and trade unions will on Monday urge corporate America to scrap quarterly earnings guidance in an attempt to curtail the influence of hedge funds and other short-term investors.
The move, backed by leading corporate figures such as Jeff Kindler, chief executive of Pfizer, and Anne Mulcahy, his counterpart at Xerox, will increase pressure on companies and fund managers to focus on long-term objectives rather than short-term fixes.
The broad-based coalition, whose participants range from the Business Roundtable, which represents 160 leading US chief executives, to the AFL-CIO, the largest union federation, will also call for an overhaul in compensation practices to reward corporate and fund managers for long-term performance.
The coalition may be unprecedented. The recommendation is not. Earnings guidance is the practice of announcing ahead of time how much money you think your company will make in the quarter. It became standard practice in the 1990s because Wall Street had started paying lots of attention to the “consensus” earnings numbers cobbled together by First Call from the estimate of brokerage-house analysts, and smart corporate executives decided that they ought to do what they could to influence those estimates so they could be sure of beating them every quarter. As with all financial innovations, this one got way out of hand–once you’ve announced how much money you’re going to make, you’re under an awful lot of pressure to actually make that much money, or at least pretend that you did. After the market crashed and Enron and Worldcom unraveled, some companies began renouncing the practice.
Last year, the CFA Institute and the Business Roundtable’s Institute for Corporate Ethics issued a set of recommendations on the curse of “short-termism” in corporate America that was very critical of earnings guidance. It stopped short of calling for an outright end to it because the CFA Institute represents investors (along with financial analysts of other stripes), and several of the investors on the joint task force simply had trouble swallowing the idea that agreeing to give out less information was always and everywhere a good idea. (I know because I was there at the meetings.)
These investors were enthusiastic about the approach of insurer Progressive, which gives no earnings guidance but instead releases lots more financial information to investors (on a monthly basis) than the SEC requires. But I suspect that many corporate executives harbor a secret desire that ending quarterly guidance will allow them to somehow hide from Wall Street. Fat chance of that.
Update: The proposals outlined in the FT article go by the name “Aspen Principles” and were composed under the auspices of the Aspen Institute. You can read a press release about them here or download a pdf of the principles here.
