SEATTLE, WASHINGTON - JANUARY 6: An Alaska Airlines Boeing 737 MAX 9 plane sits at a gate at ... [+]
For more than a decade, research has consistently found that most corporate executives believe short-term pressure is growing, that it is changing their business decisions, and that those changes are destroying value. A chief cause of this phenomena are quarterly forecasts, or quarterly earnings per share guidance, which propel short-term thinking by harnessing management teams to self-imposed targets.
Last week, Boeing
But perhaps Boeing's decision is also indicative of a broader shift in the corporate world, underscoring a deeper understanding of the detrimental effects of short-termism on value creation.
The push for quarterly earnings guidance from the sell side has long been a bone of contention. The premise is straightforward: A fixation on quarterly forecasts encourages behaviors that undermine long-term corporate value, pushing executives to prioritize immediate results over sustainable growth. By eliminating the compulsion to meet near-term financial benchmarks, the company is signaling a commitment to long-term strategic goals over cutting corners to meet short-term earnings targets. This decision is grounded in the understanding that real value creation is a marathon, not a sprint.
At least in the United States, companies are slowly learning this lesson. As recently as 2023, 23 percent of S&P 500 companies issued quarterly guidance. That this number has declined compared to a decade ago (from 36 percent in 2010) is a good sign, but it should be essentially zero. By comparison, just 1 percent of EuroStoxx 300 companies issue guidance.
Boeing’s recent troubles are hardly the first time that uncertainty has inadvertently put a company on the long-term track. In the second quarter of 2020, at the height of the pandemic, the number of companies in the S&P 500 issuing guidance dropped to just over 10%. But many resumed the practice once market conditions stabilized.
Companies that continue to issue quarterly guidance do so under the influence of two pervasive myths – that it increases valuation and reduces volatility.
On the first, the perception is that hitting quarterly targets creates a “management credibility premium.” The fact is there is no such thing; analysis of S&P 500 members from 2010–2016 found guidance policy had no effect on valuation whatsoever.
On the second, the idea is that guidance helps reduce volatility by taming investor expectations. The reality is entirely the opposite. Companies offering annual guidance over the same six-year period experienced lower volatility around reporting periods when compared with those that issued quarterly guidance.
Moreover, research suggests that the practice of issuing quarterly guidance contributes to a misalignment between companies and their investor base. Companies fixated on short-term results tend to attract like-minded, transient shareholders, according to a study by Harvard Business School. In contrast, those that articulate and pursue a long-term vision are more likely to attract and retain investors who share their outlook. Boeing's decision can thus be seen as a strategic move to realign its investor relationships and shore up support at an extremely pivotal point for the company.
This alignment between company strategy and investor expectations creates a virtuous cycle, where companies can pursue ambitious, long-term projects without the constant pressure to deliver immediate financial results. For Boeing, this could mean the leeway needed to get to the bottom of what went wrong with the 737 MAX without the risk of missing their quarterly target looming for the next three months.
Ideally, Boeing’s delay in forecasting turns into a complete cancellation. Such a move could very well inspire other companies to reevaluate their own practices, catalyzing a broader shift that benefits the economy and society at large – a shift towards a future where long-term growth is the guiding principle.
