Profit Predictions Called 'Fool's Game'
Thursday, December 1, 2005
NEW YORK Nov. 30 -- U.S. Chamber of Commerce president and chief executive Thomas J. Donohue on Wednesday called on all publicly traded companies to stop offering quarterly earnings guidance, saying such predictions create a damaging focus on "meaningless short-term performance" and undermine a company's ability to manage for the long term.
"Earnings projections are a fool's game for management," Donohue said at a conference organized by the Wall Street Analyst forum. "Companies want to project numbers that will please Wall Street, their shareholders, and all of the bloggers and talking heads on cable TV.
"All company executives, especially those of large public companies, should follow the lead of others who have stopped issuing earnings guidance. Short of that, companies should never offer a single figure instead of a wide range."
Some academics and prominent business executives, including Berkshire Hathaway Inc. chief executive Warren E. Buffett, have said Wall Street's relentless focus on whether companies hit or miss quarterly earnings targets encourages balance-sheet manipulation and discourages long-range planning. Buffett is a board member and major shareholder of The Washington Post Co., which does not offer quarterly guidance.
Donohue, whose organization says it represents 3 million domestic and foreign corporations, said he hoped to "start a stampede" of companies refusing to give quarterly guidance. He said many executives despise giving such guidance but are afraid to stop because they think they would be punished by Wall Street analysts and shareholders. Donohue said he hoped his comments would embolden more executives to take a stand.
"Warren Buffett and others have very publicly voiced concern about this focus on quarterly earnings and, in particular, guidance about future" earnings per share, he said. "But they speak for themselves and their companies. As the head of the nation's largest business organization, I can tell you that CEO frustration with earnings expectations is widespread and rapidly growing."
Donohue said the statements executives make about quarterly earnings are an increasing focus of class-action shareholder lawsuits. He said that if a large number of companies stop giving guidance, there would be "chaos for a couple of months or quarters" but that investors and analysts would "get used to finding another way to evaluate companies."
A study of 527 companies released in March by the National Investor Relations Institute found that the number of companies offering quarterly guidance had dropped slightly since 2003, to 71 percent from 77 percent. The survey also found that 36 percent of companies were considering dropping quarterly earnings guidance.
Donohue also criticized the 2003 global research settlement, in which 10 large Wall Street firms agreed to separate stock research from investment banking and to make other structural changes. Since the settlement, Donohue said, fewer companies are receiving coverage from Wall Street analysts.
"There is redundant research on Fortune 100 companies, even while small companies with great prospects go uncovered," he said. "Two-thirds of Nasdaq companies are covered by one or no analysts. Small companies then feel obligated to play the quarterly earnings game simply to get attention."
He also said the Securities and Exchange Commission should reconsider the rule, known as Reg FD, that requires that companies provide all significant financial information to the entire investing public at the same time.
"Reg FD, while a well-intentioned attempt to level the playing field of information, has ended up chilling corporate speech," he said. "Faced with the SEC's hyper-enforcement regimes, corporate lawyers advise their management to say as little as possible about what is happening at the company."