Aspen Institute Calls for End to Quarterly Guidance

A broad alliance of business interests working under the aegis of the Aspen Institute is announcing today a new set of corporate principles that includes an end to quarterly guidance. The new principles call for greater communication with shareholders to give them a longer-term perspective on a company and its stock. Rather than look at quarterly results, the Aspen declaration calls for a five-year time horizon. It is the right thing to do, but there are a host of pressures against it.

Francesco Guerrera of the Financial Times’s New York bureau broke the story late last night. His report also says, “The broad-based coalition, whose participants range from the Business Roundtable, which represents 160 leading US chief executives, to the AFL-CIO, the largest union federation, will also call for an overhaul in compensation practices to reward corporate and fund managers for long-term performance.” The focus on the quarterly results means business is hamstrung in the long-term and that American business is at an international disadvantage. He added, “corporate leaders and academics argue that the pressure to meet quarterly forecasts prompts companies to forgo long-term investments such as capital expenditure and research and development.”

With more than half of US public companies offering quarterly guidance, giving it up will be hard. Mr. Guerrero explains, “In private, many US chief executives say they have to provide their own quarterly earnings forecasts because analysts and investors demand them. Some express the fear that ending the practice would hit their companies’ share prices or that analysts would put out inaccurate forecasts.” To which a long-term observer would say “so what?”

If an end to quarterly guidance means fewer buyers of a stock, then it is clear those departing purchasers are not focused on the long-term value of the company. Although it hurts the stock price in the short run, having day-traders and short-term speculators avoid one’s stock is a good thing for stability and reasonable pricing. And if the analysts are wrong, is that the fault of the company or of the analysts? Maybe part of the problem is short-term thinking in the board room.

Guerrero writes, “Hedge funds and other short-term investors tend to like guidance because the discrepancies between actual and forecast earnings offers [sic] them lucrative trading opportunities.” Just the sort of thing a properly run board would oppose. After all, if one wants to gamble, there are better odds in Las Vegas and Atlantic City than on Wall Street.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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