Boston, MA, October 24, 2017– FCLTGlobal, a not-for-profit organization that works to encourage a longer-term focus in business and investment decision-making, today published a report, Moving Beyond Quarterly Guidance: A Relic of the Past, calling into question the need for quarterly guidance to shareholders and investors. The report debunks long-held industry misconceptions about the importance of short-term earnings guidance, and argues that companies and investors should move away from this practice.
Key findings from the report show:
Providing quarterly forward earnings guidance (as distinct from quarterly reporting) is increasingly on a downward trend among major companies
Quarterly guidance does not improve valuation or reduce volatility
A focus on quarterly guidance leads management teams to under-invest in the future and contributes to poor earnings growth; and
Leads to companies managing around quarterly targets which attracts investors with a short-term orientation.
Providing a long-term strategic roadmap for investors can be more effective at grounding the investor/corporate dialogue. “Investors no longer believe that short-term earnings results are indicative of long-term success, and are highly aware of the imprecision of its reporting metrics,” said Sarah Williamson, CEO of FCLTGlobal. “Just 28% of S&P 500 companies and less than 1% of EURO STOXX 300 companies currently issue quarterly guidance. Whereas quarterly reporting provides transparency, guidance is counterproductive and increasingly a thing of the past.”
The paper suggests that selecting key metrics and setting benchmarks against three to five-year outlooks are more effective for establishing a sustained investor base, as industry leaders such as Unilever, Facebook, GlaxoSmithKline, and BP have demonstrated.
“As a long-term investor, we assess and grow the long-term intrinsic value of companies we invest in. We believe the quarterly guidance practice does not add value to our investment process. It may even be a major distraction for companies themselves due to the human tendency to strive harder to fulfil public commitments, including short-term ones. Instead, we work with management teams and boards to focus on longer term decision-making and resource allocation which we believe are key to creating sustainable value,” elaborated Lim Chow Kiat, CEO of GIC, Singapore’s sovereign wealth fund and a FCLTGlobal member.
Moving Beyond Quarterly Guidance: A Relic of the Past is a result of a global working group of corporate investor relations experts and institutional investors staff from FCLTGlobal’s Members, with research contributed by KKS Advisors, Harvard Business School, FactSet, and Rivel Research Group. The report continues FCLTGlobal’s research agenda to outline tangible steps companies and investors can take to be more long-term oriented. The full report is available online at fcltglobal.org/research/publications/guidance
FCLTGlobal is dedicated to developing practical tools and approaches that encourage long-term behaviors in business and investment decision-making. It takes an active and market-based approach to achieve its goals. By conducting research and convening business leaders, FCLTGlobal develops tools and generates awareness of ways in which a longer-term focus can increase innovation, economic growth and future savings.
FCLTGlobal was founded in 2016 by BlackRock, Canada Pension Plan Investment Board, The Dow Chemical Company, McKinsey & Company, and Tata Sons. Its membership encompasses asset owners, asset managers and corporations from around the world, including:
- Caisse de depot et placement du Quebec
- Cisco Systems
- Ernst & Young
- Australian Government Future Fund
- Hillhouse Capital
- Kempen & Co.
- Khazanah Nasional
- Kotak Mahindra Bank
- New Zealand Superannuation Fund
- Ontario Teachers’ Pension Plan
- Russell Reynolds Associates
- State Street Global Advisors
- Sullivan & Cromwell
- Washington State Investment Board
- Wellington Management