US Companies Call for End of Quarterly Earnings Guidance

Leaders from major US companies, analysts, and fund managers will today urge an end to quarterly earnings guidance, citing concerns that it damages shareholders and hinders corporate governance. This move, spearheaded by the Business Roundtable Institute for Corporate Ethics and the CFA Institute, will put pressure on US-listed companies to abandon short-term targets, mirroring the approach of companies like Pfizer, Intel, and Motorola. The report will recommend scrapping guidance and revising executive and fund manager compensation models to focus on long-term performance rather than short-term metrics.

Key Takeaways:

• The Business Roundtable Institute for Corporate Ethics and the CFA Institute will release a report today arguing that quarterly earnings guidance damages shareholders and corporate governance.
• The report was based on 10 months of discussions with companies, investors, analysts, and regulators, and cites research showing that the obsession with short-term results destroys long-term value, decreases market efficiency, and reduces investment returns.
• Over half of US-listed companies provide earnings guidance every quarter, down by a third from 2003, according to a recent National Investor Relations Institute survey.
• Hedge funds benefit from earnings guidance as it allows them to profit from discrepancies between forecasts and actual earnings.
• Despite potential pushback from executives who fear share price drops, the report argues that focusing on long-term business health is more beneficial than meeting short-term forecasts.
• Business Roundtable President John Castellani stated that while his organization has not officially adopted the report's recommendations, it is clear that short-term focus has negative effects on behavior and shareholder value.
• Steve Odland, Office Depot CEO and Business Roundtable corporate governance task force head, emphasized that once a company sets a forecast, everyone within the business is focused on meeting it rather than making decisions beneficial to the company.

Statistics:

• 160 US chief executives are members of the Business Roundtable Island for Corporate Ethics.
• Over 80,000 analysts and fund managers are part of the CFA Institute.
• 50.7% of US-listed companies provide earnings guidance every quarter, down from 74.5% in 2003, according to the National Investor Relations Institute.

Sources:

• Business Roundtable Institute for Corporate Ethics and CFA Institute report (no specific date provided).
• National Investor Relations Institute (no specific date provided).
• Business Roundtable President John Castellani.
• Steve Odland, Office Depot CEO and Business Roundtable corporate governance task force head.