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| Tuesday, February 9, 2010 |
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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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April 9, 2007 12:01 AM ET
During 3M’s fourth-quarter earnings conference call on Jan. 30, CEO George Buckley didn’t give any guidance on the company’s first-quarter earnings. And he won’t give any for the second quarter when the company reports on April 26. Late last year, 3M abandoned the practice of guiding investors and equity research analysts toward quarterly earnings-per-share numbers. The St. Paul, Minn., conglomerate now provides official guidance on annual earnings only. Mr. Buckley joins a growing number of corporate chieftains of public companies who are choosing not to give specific guidance on quarterly earnings. Other companies that have recently abandoned the practice include Motorola, Citigroup, ExxonMobil and AT&T. Warren Buffett, the paragon of long-term management perspective, and Google have never provided quarterly earnings guidance. The Chartered Financial Analyst Institute, which represents investment professionals and analysts, is the latest organization to chime in. The institute, along with the Business Roundtable Institute for Corporate Ethics, released a report last week titled “Apples to Apples: A Template for Reporting Quarterly Earnings.” Recommendation No. 1? Stop giving quarterly profit guidance. “It’s become a problem with respect to what is driving companies’ business decisions,” said Kurt Schacht, a managing director at the CFA Institute. The emphasis on hitting the quarterly numbers has become a distinguishing characteristic of U.S. equity markets. But critics charge it’s just not worth the effort and that it takes executives’ eyes off managing their businesses for the long haul. “We manage 3M to create long-term sustainable value,” Mr. Buckley explained during the company’s fourth-quarter conference call. Mr. Buckley said that quarterly earnings could shift by a penny or two not because of fundamental business trends but as a result of individual customer decisions or volatility in the company’s tax rates. He also said the practice was not in investors’ interests. Business organizations like the U.S. Chamber of Commerce are also exhorting public companies to give up the practice. It was one of the chief recommendations of the Chamber’s report on the regulation and competitiveness of U.S. capital markets that it issued last month. “All our other proposals required action from the SEC or another government body,” said Robert Pozen, chairman of MFS Investment Management and one of 15 members on the Chamber’s commission. “This is something that the corporate community can do on its own.” MFS parent SunLife does not give quarterly earnings guidance. The benefits to corporate managers are clear. “No CEO likes doing this. It’s not a good use of managers’ resources and time,” said Mr. Pozen. It’s also skewing their decision-making. A survey by the National Bureau of Economic Research last year found that 80% of 401 CFOs polled said they were willing to put off discretionary spending like research and development to make their quarterly numbers, and 55% were willing to delay long-term projects with a positive return that might hurt their short-term results. Along with the potentially negative impact on competitiveness, the focus on short-term performance can also lead managers down the path to fraud. “The excessive focus on meeting quarterly numbers can result in manipulating those numbers,” said Mr. Pozen. And as countless cases of accounting fraud suggest, the problems usually start small, with executives cutting a corner here, tweaking an estimate there to meet the quarterly numbers. The pressure to do so would be far less intense if companies chose not to give guidance. Wall Street analysts might seem addicted to the quarterly projections that a majority of public companies still provide (roughly two-thirds of S&P 500 companies give quarterly earnings guidance), but 76% of investment analysts favor eliminating them, according to a CFA survey. The practice has only become widespread since passage of the Private Securities Litigation Reform Act of 1995, which gave companies a safe harbor to make forward-looking projections of their performance. The decision to stop the practice might scare some companies, but it’s worth it in the long run.
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