Just Say No?
It's practically a fad. Big-league companies like Alcoa, AT&T, Mattel, PepsiCo and Sun Microsystems are saying no to giving corporate-earnings guidance, or at least the quarterly variety. Only 55 percent of companies gave any guidance at all last year, down from 72 percent in 2003, according to a Greenwich Associates survey of 385 CFOs and other senior-level executives.
That's good news, according to many Wall Street watchers. "I see that, and I think, 'Great,'" says Harvard Business School professor Michael C. Jensen, who wrote his own report on the subject in 2002. He and others contend that short-term guidance leads to a short-term mentality, for both companies and their investors. Rather than focus on the underlying fundamentals, all eyes are fixed on the bottom line, and companies are under intense pressure to meet it or beat it. If they don't, they risk the wrath of the market and the immediate loss of shareholder value. That leads management, some say, to make short-term decisions that undermine long-term growth, such as holding off on important R&D spending or canceling a marketing campaign that could generate sales. "Getting caught up in this quarter-to-quarter earnings management game will only lead to value destruction," says Jensen.
Trouble is, Wall Street has gotten used to quarterly guidance, and analysts expect it. Small-cap CEOs, whose companies tend to attract less coverage anyway, may worry that refusing to give guidance will result in wholesale abandonment of the stock by the analyst community. It's not an unfounded concern, given that the sell-side divisions of investment banks are stretched very thin, with fewer analysts trying to cover more companies, says Louis M. Thompson Jr., president and CEO of National Investor Relations Institute. But he doesn't see that as an overwhelming factor for small-company CEOs. "If a research firm doesn't see a lot of market activity in a stock, that is a much bigger factor than is providing [earnings] guidance as to whether they want to devote the resources [to covering a company]." And consistent, positive news related to the fundamentals of the business is ultimately what generates consistent market activity, not quarterly pre-earnings guidance. Thompson notes that, rather than doing away with guidance, more companies are moving to annualized numbers to encourage the longer outlook. In fact, a 2005 National Investor Relations Institute survey of 527 corporate members found that 61 percent of companies are furnishing annualized guidance, up from 38 percent in 2003, while those offering only quarterly ranges declined from 53 percent to 28 percent in the same time period.
Others argue that CEOs who clam up are only cutting off their own noses. "The more disclosure out there for the analyst, the less uncertainty there is," says Nick Raich, director of research for Zacks Investment Research in Chicago. "For smaller companies, without that guidance and certainty out there for the Street, it just creates more volatility for the stock." Often, he adds, when companies fail to provide guidance, analysts come up with numbers, and they can be way off the mark.
But maintaining an investor-relations strategy and healthy communication with Wall Street doesn't have to equal spitting out a bottom-line number. "Most analysts and investors don't want just the bottom-line number--they want to know how you are getting there," says Deborah Pawlowski, chair and CEO of Kei Advisors LLC, an investor-relations firm based in Buffalo, New York. They want to see key elements of the company's business strategy, and current and projected numbers for expenses, revenues, industry trends and how predictable all of those are. Pawlowski adds that analysts are only one gateway to investors. "Two-thirds of the companies out there aren't covered by an analyst," she adds. "So why does everyone think you need to be?"
You don't, of course, as many flush small-cap companies can attest. But for those who want to maintain that sell-side connection, it can be tough to hold their ground. "Saying no to people with power is always uncomfortable," says Jensen. But he argues that all companies--and their shareholders--would benefit if more companies refused to let analysts and investors judge them on their short-term gains. "My guess is, five years down the road, we're going to have a new, stable, much more productive environment," he says. "At least, that's what I'm hoping."
C.J. Prince is executive editor of CEO Magazine.