200 CEOs – including Dimon, Buffett – urge companies to make this change
The Business Roundtable, an association of nearly 200 CEOs from major U.S. companies is urging companies do away with providing quarterly earnings per share guidance, which puts an unhealthy focus on short-term profits at the expense of long-term strategy.
"We are encouraging all public companies to consider moving away from providing quarterly earnings-per-share guidance," wrote JPMorgan Chase chairman and CEO Jamie Dimon and Berkshire Hathaway chairman and CEO Warren Buffett in an op-ed in The Wall Street Journal.
According to these corporate titans, issuing guidance leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability. The leaders said this results in less "technology spending, hiring, and research and development."
Quarterly guidance was seen as a way to reduce stock market volatility, but research from consulting firm McKinsey & Co., found that there was no evidence that providing guidance improves shareholder returns or reduces share volatility.
In fact, McKinsey’s research found that the only significant effect they observed from firms providing this guidance was an increase in trading volumes when companies start issuing guidance, “an effect that would interest short-term investors who trade on the news of such announcements but should be of little concern to most managers, except in companies with illiquid stocks,” the researchers wrote.
While there were no significant positives, there were negatives. Providing this guidance has real costs including the time senior management must spend preparing the reports and an excessive focus on short-term results.
McKinsey’s researchers concluded that to maintain good communications with analysts and investors, companies that currently provide quarterly earnings guidance should shift their focus away from short-term performance and toward the drivers of long-term company health, as well as their expectations of future business conditions and their long-range goals.
Further, companies that don't currently issue guidance shouldn’t start. The consulting firm noted that increasingly, companies are discontinuing guidance.