As Bells Toll for Earnings Guidance, We Ponder Progress

There was a lot of buzz around NACD’s offices earlier this month as our people learned that momentum is building to end quarterly earnings forecasts. You can’t work at NACD for very long without learning that our members champion long-term value creation and oppose short-termism, or without coming to understand how earnings guidance destroys the former and promotes the latter. (Short-Termism 101: when companies estimate the next quarter’s earnings per share, they drive a 90-day focus on meeting that projection and discourage focus on the organization’s long-term vision.)

Our communal excitement stemmed from reports of an interview on CNBC’s Squawk Box featuring Berkshire Hathaway CEO and chair Warren Buffett and JPMorgan Chase CEO and Business Roundtable member Jamie Dimon. During the June 7 interview, the two iconic businessmen agreed that companies should stop providing quarterly earnings guidance. NACD’s researchers noticed the interview and hailed it as “great news.” They praised the Business Roundtable for its “leadership” and shared links to relevant research with me, like this study asking Does the Cessation of Quarterly Earnings Guidance Reduce Investors’ Short-Termism?, and this one on Moving Beyond Quarterly Guidance: A Relic of the Past from FCLTGlobal, the think tank for focusing capital on the long term.

Later that day, NACD put out a press release noting that while NACD had called for a move away from quarterly earnings guidance in the past, the problem was still lingering in 2017. The 2017–2018 NACD Public Company Survey found that nearly three-quarters (74%) of respondents said that focus on long-term strategic goals has been compromised by pressure to deliver short-term results. Frankly, the finding was discouraging, considering how many years we have all been working to reverse short-termism.

Perhaps a flashback is in order. Dimon and Buffett were not the first to advise ridding corporate America of short-term guidance, and the Squawk Box interview wasn’t even the first time they themselves had done so.

• In June 2010, exactly eight years ago this month, NACD joined the Business Roundtable as some of the first subscribers to an Aspen Institute manifesto entitled Long-Term Value Creation: Guiding Principles for Corporations and Investors. One of the principles in that document was the recommendation that companies and investors should “avoid both the provision of, and response to, estimates of quarterly earnings and other overly short-term financial targets.” I was happy to sign on. Even prior to 2010 NACD had been making recommendations against short-termism in our Blue Ribbon Commission reports, our Key Agreed Principles, and other publications, especially those addressing executive compensation.
• In October 2015 NACD issued the Report of the NACD Blue Ribbon Commission on the Board and Long-Term Value Creation, where we made a similar recommendation: “Boards should consider recommending a move away from quarterly earnings guidance in favor of broader guidance parameters tied to long-term performance and strategic objectives.”
• In July 2016, both Dimon and Buffet themselves had signed onto a similar recommendation when developing Commonsense Corporate Governance Principles, which was published with backing from large institutions and companies across the investment chain. I spoke about the principles on C-Span the following month. The 2016 Principles stated that “companies should not feel obligated to provide earnings guidance—and should do so only if they believe that providing such guidance is beneficial to shareholders.” They further state that “making short-term decisions to beat guidance . . . is likely to be value destructive in the long run.”
• In September 2016, I was a delegate at the General Counsel Summit on Short-Termism and Public Trust. The report from that event cited the 2016 Principles with respect to earnings guidance, as well as research from the Conference Board and others dating back more than a decade in questioning the wisdom of earnings guidance.

So looking back, the journey to end earnings guidance has been long. But that was then and this is now. Dimon today chairs the Business Roundtable (he was named chair in December 2016). And on the morning of June 7, the medium was an important part of the message: there were Dimon and Buffett, expressing their views in plain, spontaneous language, live, for all the world to see and hear in all their familiarity.

Progress

This entire history reminds me of a quote by Scottish author and government reformer Samuel Smiles, known for his treatise on self-improvement, Self-Help. He wrote: “Progress, however, of the best kind, is comparatively slow. Great results cannot be achieved at once; and we must be satisfied to advance in life as we walk, step by step.”

Thanks to many steps by many people over many years, the bell is tolling for earnings guidance at last. And that is indeed the best kind of progress.