Tag Archive: NACD Key Agreed Principles

As Bells Toll for Earnings Guidance, We Ponder Progress

Published by

Peter Gleason

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.

The Power of Principles

Published by

Peter R. Gleason

An old boardroom adage is that directors must be “proactive,” rather than “reactive.” But what does this mean? When disruptive events occur, boards need to respond to them—so isn’t this reaction? I believe that board action must be based on principles, which I define (with Merriam-Webster) as a “moral rule or belief that helps us know what is right and wrong and that influences our actions.”  A board’s response is reactive if directors focus mainly on an event; it is proactive if it stems from their values.

Principles Matter

Principles can make a positive difference in the destinies of enterprises that embrace them. That is why NACD is in the principles business, so to speak. Every year since our first Blue Ribbon Commission gathered to discuss executive compensation a quarter century ago, we have been asserting general concepts that have had a measurable impact on boards. As this past research blog explains, many of our Blue Ribbon Commission reports and the principles they advocate have had a measurable influence on board practices. We know this by comparing the recommendations of our reports, and subsequent changes in practices as measured by our surveys.

And the good news is that a principles-based approach to governance can improve corporate financial performance. While many governance researchers have tried and failed to show a correlation between specific governance practices and financial performance, performance does seem correlated to an overall principles-based approach. Following the introduction in various countries around the world of principles-based governance (e.g., comply or explain stock listing standards), there have been improvements in financial performance. Studies in many jurisdictions, including AustriaCanadaKenyaNew Zealand, demonstrate the evidence.

Principles can also forge consensus. When you boil things down to basic principles, the three main actors on the governance stage—management, shareholders, and directors (the three sides of the so-called governance triangle)—think remarkably alike. Governance pioneer Ira M. Millstein noted this ten years ago in an NACD board discussion. When Ira speaks, boards listen. He was the original author of the first governance guidelines at General Motors Co., and, with Holly Gregory, a drafter of the original OECD Principles of Corporate Governance, another powerful guide to board work.

The NACD board responded to Ira’s idea by urging us to undertake what became the original Key Agreed Principles, which presented all known areas of agreement in principles published by the Business Roundtable, the Council of Institutional Investors, the International Corporate Governance Network, and NACD. NACD principles at the time numbered in the hundreds; they resided in the many Blue Ribbon Commission reports we had published on various governance subjects.

Other Notable Principles Documents

Since then, the Key Agreed Principles document has remained relevant to many boards.  We have seen these Key Agreed Principles affect positive change in many areas, and we have seen other groups seek a principles-based approach to their activities.

In 2015, the Global Network of Director Institutes (GNDI), a group cofounded by NACD, developed and released Guiding Principles of Good Governance intended to be useful for the some 100,000 directors around the globe who belong to the institutes comprising GNDI. Another notable example is the set of “Commonsense Principles”document released in 2016 by a group of major company CEOs and leading institutional investors. In 2017, the Investor Stewardship Group released Principles: Stewardship Framework for Institutional Investors.

In the future, in consideration of the new blueprints from these other groups, as well as developments at NACD itself, we will release a new edition of the Key Agreed Principles. To do so, we will once again compare the principles currently advocated by the original signatories.

Why Principles?

Why keep the Principles document going? I believe that when directors apply sets of principles, rather than a hodgepodge of arbitrary rules, they can engage their minds and wills for action. Some principles in corporate governance prove so true that they operate as powerfully as first principles in science, determining outcomes. It may well have been principles that created our very nation. After all, Thomas Paine noted that “An army of principles can penetrate where an army of soldiers cannot.”

With good principles at hand, boards are always ready to respond to the next crisis, and to prevail with strength and wisdom. We trust that the power of principles will continue to animate corporate governance—and improve firm performance—in the years to come.