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Just Say No?

More big companies are refusing to give Wall Street quarterly earnings guidance. Should small firms jump on the bandwagon, too?

This story appears in the August 2005 issue of Entrepreneur. Subscribe »

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.

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