IROs Push to End Guidance

By Dean Krehmeyer

Investor relations officers are playing a significant role in decisions to end guidance at firms. In a recent survey, National Investor Relations Institute (NIRI) studied companies that recently discontinued financial guidance. NIRI found that 28% of the decisions to discontinue financial guidance stemmed from the IRO.

The list of organizations calling for companies to discontinue earnings guidance keeps growing. As a co-author of a report on ending short-termism in the marketplace, I am among those voices in the “stop guidance” chorus.

Good News/Bad News
Academic research shows that guidance may actually lead to value destructive behaviors and actions. For example, Sarbanes-Oxley has resulted in a good news/bad news story. The Sarbanes-Oxley requirement that the CEO and CFO sign and authorize corporate financial statements may be having the desired effect of reducing the willingness of companies to utilize accounting tricks, such as reserve adjustments, to meet quarterly earnings estimates.

However, the bad news is that more companies are engaging in real actions—not just accounting tricks—to meet earnings projections. In July 2006, New York Times Columnist Joe Nocera wrote a story on Campbell Harvey, a Duke University professor who conducted a study on the effects of short-term thinking.

Professor Harvey concluded that companies “are doing things that effect the real operations of the company, like postponing R&D. And things like R&D create real value in the long term.”

Need to Focus on Value, Not Numbers
Value creation is the basis of what makes business a moral and a profitable enterprise. Ending the guidance game creates an opportunity for the company and the IRO to create value and provide more and better information to stakeholders.

Candace Browning, Head of Global Securities research at Merrill Lynch & Co. testified before Congress that focused earnings guidance “dictates an outcome [that] cannot possibly convey the subtle forces that shape a wise…decision.”

Her recommendation: Companies should provide investors with information “on long-terms goals or targets such as reducing costs, increasing market share, growing capacity, and improving return on equity.”

Again, this helps to focus attention on the strategic value-creating purpose of the firm, instead of on an arbitrary number.

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Dean Krehmeyer is Executive Director of the Business Roundtable Institute for Corporate Ethics. He can be reached at director@corporate-ethics.org.