Accounting Observer > Public Blog - The High Road On Earnings Guidance: Stop It!

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The High Road On Earnings Guidance: Stop It!

Location: Blogs AAO Weblog (Public)
Posted by: Jack Ciesielski	7/27/2006 6:05 AM
An interesting joint effort on the part of odd bedfellows Business Roundtable and the CFA Institute: a document that urges companies to stop issuing earnings guidance. It's a document entitled "Breaking the Short-Term Cycle" (catchy, yet accurate) and you can download it here. I haven't read the entire document yet, but I can't help but agree with their basic principles: companies should stop spoon-feeding "guidance" to analysts and issue hard facts for them to work with - facts about strategies and plans for managing the assets owned by shareholders. Put it in the context of say, Microsoft. Are the interests of the firms' long-term shareholders better served by having their resources directed at a constant spewing of guidance about where this quarter's earnings are headed - or are the long-term investors better served by "guidance" about how the firm plans to meet the challenges of say, web-based software? The groups' recommendations don't end with simply calling for the end of earnings guidance. They recommend an alignment of "executive compensation with long-term goals and strategies and with long term shareowner interests." (You know, what employee stock options were supposed to do. With the SEC 's new executive compensation disclosures, maybe some progress can be made towards that end. Jury's out for a while on that one.) You could say that that's the same old tired exhortation but they go one big step further: they make some pretty big demands on the institutional investor side to cure "short-termism." They recommend that asset manager compensation be aligned with long-term client interests and to improve disclosure of their incentives, fee structures and personal ownership of funds managed. Fair enough; people who live in glass houses shouldn't throw stones. And when we're talking about handling other people's money, whether it's corporate managers working for shareholders, or professional investors working for clients, glass houses are the only kind permitted by the construction code. It's hard to see how the issuance of earnings guidance doesn't create a climate of "real men make their earnings forecasts - by any means possible" - including the stretching of judgment to ridiculous lengths in preparing accounting estimates. I think the Business Roundtable and the CFA Institute are on to something here.

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