Since 2005, research has consistently found that the vast majority of corporate executives think that short-term pressure is growing, that it is changing their business decisions, and that those changes are destroying value. One effective way that corporations are combating this phenomenon is by moving away from quarterly earnings per share (EPS) guidance and instead providing investors with a long-term road map focused on the fundamental economic drivers of the business tied to management’s outlook on critical key performance indicators (KPIs).
As we highlighted in our 2015 guide for restructuring the investor corporate dialogue, Straight Talk for the Long Term, quarterly EPS guidance constitutes a critical channel through which short-termism impacts companies and capital markets. By harnessing management teams to self-imposed short-term targets, quarterly guidance ensures that both investors and companies will focus on this time horizon.
It is critical to distinguish quarterly guidance, which relies on forecasts issued by companies to influence market expectations, from quarterly reporting, the retrospective reporting of factual performance, and consensus estimates, external analysts’ forecasts of earnings performance. Quarterly reporting remains essential in providing investors with the transparency they need and in keeping management teams accountable for their performance. On the other hand, consensus earnings estimates will continue to be a feature of markets regardless of what companies choose to disclose. If companies do not issue guidance, a mismatch between reported earnings and consensus indicates an inaccurate forecast rather than an earnings “miss.” This paper is aimed not at reporting or consensus estimates, but at the issuance of quarterly earnings guidance alone.
Indeed, there is mounting evidence that companies that play this quarterly guidance game ultimately suffer. Their focus on short-term metrics often leads them to prioritize decisions that will yield the most attractive results on a quarterly basis and neglect their long-term strategies. Such an approach results in companies, sacrificing valuable investment opportunities and erodes the foundation of long-term, stable shareholders on which they depend.
A recent Harvard study helped confirm what many have long suspected, that companies get the investors they deserve. Focusing on short-term metrics attracts transient, short-term shareholders, compared to peers who issue guidance with a long-term orientation. The inverse holds true as well: long-term companies can attract the right investors. Companies that choose to offer shareholders a long-term vision and strategy benefit not only from a reduced focus on short-term metrics but also by attracting and building a long-term investor base. This virtuous cycle – in which companies that focus on the long-term attract investors who support their longer horizons – is within the power of management teams to achieve.