Each stakeholder along the investment value chain must play a role in shifting to longer-term decision making. Today’s investment community, in large part, has become fixated on hitting immediate goals, losing sight of savers’ broader objectives in the process. An effective way for both companies and investors to correct this imbalance is to avoid short-term dialogue, including practices like offering and evaluating quarterly earnings guidance, and instead center their dialogue on strategies that build support for long-term growth.
Building on our earlier work on the investor-corporate dialogue, FCLTGlobal made this case in its report Moving Beyond Quarterly Guidance: A Relic of the Past, which demonstrates that companies offering quarterly earnings guidance perpetuate a short-term focus internally to their employees and externally to their investors.
Since that publication, we’ve seen a growing call to shift away from quarterly guidance from key voices across the American corporate landscape.
In their joint opinion piece in the Wall Street Journal, “Short-Termism Is Harming the Economy”, Warren Buffett (Chairman of Berkshire Hathaway Inc.) and Jamie Dimon (CEO of JPMorgan Chase & Co.) urged public companies to reduce or eliminate the practice of estimating quarterly earnings. Writing on behalf of the Business Roundtable, an association of leading American CEOs, Buffett and Dimon emphasized that quarterly guidance results in an overwhelming focus on the short term at the expense of “long-term strategy, growth and sustainability”.
“Reducing or even eliminating quarterly earnings guidance won’t, by itself, eliminate all short-term performance pressures that U.S. public companies currently face, but it would be a step in the right direction,” the pair wrote. “Anything America—and America’s public markets—can do to focus on the future and build long-term wealth and opportunity will make the country stronger, more resilient and more competitive.”
When leaders like Warren Buffett and Jamie Dimon make such a powerful statement, the world takes notice. The opinion drew the attention of the wider business and media community. Mark Weinberger, CEO of EY and FCLTGlobal Board Member, spoke on the issue with CNBC the same day:
(Ending short-termism and taking the long view: EY CEO from CNBC.)
Following suit, the National Association of Corporate Directors (NACD) issued a statement from President and CEO Peter Gleason in reply to the Buffett/Dimon op-ed, supporting companies' efforts to move away from the a focus on the short term and instead “devote their attention to the long-term growth of their companies and the economy as a whole."
As stated in Moving Beyond Quarterly Guidance, providing guidance is increasingly on a downward trend among major companies, but a 28% of companies on the S&P 500 maintain the practice, represent a significant number of investors, and account for a considerable portion of total market capitalization. Quarterly guidance does not improve valuation or reduce volatility as compared to longer-term guidance, contrary to popular belief, and leads to companies managing against quarterly targets, attracting transient investors with a short-term orientation, and perpetuating an overall emphasis on the short-term in the wider market.
Along with notable names and groups in the corporate world, their investor relations counterparts are also lending their voices to the call for an end to quarterly guidance. The National Investor Relations Institute (NIRI) is the professional association of corporate officers and investor relations consultants; it is the largest organization of its type in the world. NIRI officially released an update to its guidance policies in June 2018, citing FCLTGlobal data. The new policy recommends that company guidance reflect at least a one-year term and update on metrics that represent the key long-term value drivers of a company’s business.
“NIRI believes that an undue focus on short-term, single-point guidance is undesirable and that all relevant audiences – primarily investors, financial analysts, and the news media – are better served when companies focus their guidance on the business’ long-term strategy and value drivers,” the organization said in its statement.
Instead, FCLTGlobal argues, companies should develop long-term “roadmaps” to help build trust engaging with shareholders. FCLTGlobal research finds that a long-term roadmap can help companies communicate the elements needed to build investor support for long-term strategies. With specific pieces in place – a supportive long-term investor base, a long-term strategy and the right performance indicators to give investors the transparency and information they need to back the strategy – companies can better make the decisions required to create long-term value.
Our new Idea Exchange, We Need to Talk: Driving Long-term Value Through the Investor Corporate Dialogue, suggests a new framework for engagement for companies and their shareholders. Corporate CEOs and their long-term shareholders benefit from a frank exchange of views about long-term strategy, and new parameters will aid long-term investors in sharing their perspectives with the company. Ideally, this can better integrate roadmap plans into a company’s outlook and puts investors and their corporate partners on a trajectory for sustained success.
FCLTGlobal welcomes all those eager to see an end to the practice of quarterly guidance to voice their opinion. Additionally, we would like to thank the Business Roundtable, NIRI, and NACD for their active participation in this discussion. As the movement gains momentum, we encourage you to share your thoughts on how to improve the dialogue between corporations, their shareholders, and all other stakeholders operating within the larger investment ecosystem. If your team has stopped offering quarterly guidance, or your organization is working to implement a strategic roadmap and are willing to share your experience, please contact us.