Research consistently proves that many of today’s corporate executives believe that short-term pressure is growing, that it is changing their business decisions and that of their companies, and that these changes are destroying value for their shareholders. There are many ways to stem the tide of corporate short-termism – one being moving away from quarterly earnings per share (EPS) guidance, which FCLTGlobal has recently contended to be an unneeded industry relic.
Rather than issue such guidance, companies would be better off providing investors with a plan focused on the fundamental economic drivers of the business tied to management’s outlook on critical key performance indicators (KPIs). Short-term oriented investment behaviors continue to hamper prospects for substantial, prolonged growth for many firms in the global business community, yet some of today’s leading companies have proven to be shining examples on how to stay focused on the long term through investor relations.
Here are a few of our suggested methods for moving away from quarterly-focused guidance, and real-world examples showing how some are already putting this theory into practice:
Provide guidance for metrics that will help investors understand and track the company’s long-term strategy. Such metrics include those:
- the company can comfortably and accurately predict
- ·over which the company has a reasonable degree of control, or
- that are relevant to the strategy but difficult for outsiders to estimate or analyze.
For example, Glencore (FCLTGlobal member) renovated their corporate guidance policy to reflect metrics that are specific to their unique business, including specific mineral production levels. The new strategy won awards for top corporate communications policy.
Invest resources in gathering information that investors need, and avoid extraneous or distracting items. Frame and contextualize metrics where necessary to explain key assumptions.
For example, Generali Group went from over 20 pages of quarterly financial disclosure (for the quarter ended March 30, 2016) to just two pages after the CFO determined it was not an effective use of company resources. Generali received few complaints from the investment community following the first report in the new condensed format.
Resist the natural tendency to alter metrics, introduce new ones, or abandon targets when expectations are not met. Honest conversations about shortcomings and steps underway to reposition the company build more credibility with true long-term investors.
For example, Unilever (FCLTGlobal member) ended short-term earnings guidance when Paul Polman took over as CEO in 2009. Since then, the company’s guidance policy has evolved, offering annual guidance tied to its longer-term strategic vision. This includes forecasts for underlying sales growth, operating margins, long-term cash conversation targets, return on invested capital and leverage expectations.
Offer a three- to five-year outlook for each KPI, as well as key risks and outside factors relevant to your outlook. Use this as an opportunity to share detail on market conditions, trends, operating environment, expectations, and the competitive landscape as related to the strategy and KPIs.
For example, Facebook offers a three-, five-, and ten-year plan with specific KPIs for each horizon and strategic milestones over each period. On Facebook’s Q1 2017 earnings call, CEO Mark Zuckerberg said,
“I want to give a quick update on what we’re building over three time horizons: how we’re making our core services more useful and engaging right now; how we’re building ecosystems around products that a lot of people already use over the next five years; and how we’re investing in the technologies that will give more people a voice and make sharing more immersive over the next ten years.”
This is precisely the sort of long-term insight that shareholders seek, and precisely the sort that will dissuade them from getting hung up on shorter-term matters alone.
If you offer annual guidance on KPIs, connect it to your progress toward longer-term goals, and contextualize interim results within the frame of long-term objectives.
For example, BP (FCLTGlobal member) often explains how near-term results fit into their larger strategic context when communicating with investors. CEO Bob Dudley said, during the company’s 2017 Strategy Update,
“[…] we published our year-end results for 2016 – a year where we have come a long way forward from a year ago. That was mainly about looking back. Today, with this strategy update, we’re focusing squarely on the future – we’ll focus mostly on the immediate five years ahead but we’ll also be looking beyond that to what you can expect from BP longer term.”
Use ranges rather than point estimates when possible. Ensure ranges are sensible and sufficiently broad, but precise enough to be meaningful for investors. Consider using rolling averages where appropriate to aid in highlighting elongated trends rather than brief fluctuations.
For example, GlaxoSmithKline, one of FCLTGlobal's newest member organizations, provides ranges for growth and performance estimates and explains the underlying assumptions and scenarios that drive the potential outcomes included in the range.
These companies, and more like them, stay on the leading edge of the investment community by gaining a long-term advantage. Building a strategy that looks past immediate gains and losses comes from the ground up. The perfect place to start is communicating with your own investor base, and relating to them your hopes for sustained success many years down the road – taking a page out of these companies’ books may prove valuable for you and your partners as you plan for your own long-term growth.
To learn more about our views on long-term alternative to guidance, read our white paper Moving Past Quarterly Guidance: A Relic of the Past. To stay up to date on this topic and other related investment news, follow us on social media @FCLTGlobal.