Two of the most influential names in finance, Warren Buffett and Jamie Dimon, are making a public plea for companies to end the practice of providing quarterly guidance. They are doing so in conjunction with the Business Roundtable, an association of nearly 200 CEOs from major U.S. organizations, in an attempt to move the markets away from “short-termism,” which experts feel is hurting the economy. This is just the latest clarion call from leading investors asking for a change. BlackRock’s Larry Fink, summarized the challenge best by stating “today’s culture of quarterly earnings hysteria is totally contrary to the long-term approach we need.”
We support the effort to encourage a long-term focus in the public equity markets. The advice put forth by Mr. Dimon and Mr. Buffett is sound. For more than 30 years we have been advising CEOs, Boards and IROs on investor relations, shareholder activism and corporate reputation matters. The result of our experience is that we see the practical challenges behind these goals and how moving to a longer-term focus will require changes from all market participants, not just corporations. The reality is that quarterly expectations do not disappear when guidance is ended.
Recently though we have seen firsthand the evolution of the issuer to shareholder relationship with the explosion of passive funds and a growing call from all types of investors for a change of thinking. In this shifting world we think it is time for corporate leaders to re-evaluate their practices and lead the market to a longer-term focus.
Stepping back from quarterly guidance is no easy task, and may not be right for every company in the current environment. Halting the routine can have near-term negative implications and, if not managed carefully, can destroy value. This is particularly the case if investors interpret the change as a sign of unreported trouble or are worried that they will no longer have enough information to assess a company’s true performance or prospects and thus multiples will suffer. In some cases, there may be compelling logic to continue the practice. We have seen valuation uplift to quarterly guiders in certain sectors that enjoy predictable rhythms in their financial results. Additionally, there are real benefits to companies undergoing transitions to demonstrate the effectiveness of a new strategy or initiative.
Ending quarterly guidance is a choice best made from a position of strength, versus as a reaction to delivering results below expectations or needing to revise earlier expectations downward. Strong alignment between guidance practices and the key operating metrics used to run the business is best so major corporate transitions, such as naming a new CEO, large M&A, divestitures or a major shift in strategy, all present the opportunity to revisit guidance practices without spooking investors. It is also important to remember that sell-side analysts will still model quarterly and expectations to achieve consensus quarterly estimates will still exist. Communicating broadly and effectively about growth drivers and risks to the long-term growth trajectory of a company remains imperative. Companies will also need to be clear about their rationale for dropping quarterly guidance. Be sure you can affirm no challenges to the business that are unreported. Most of all, be sure you clearly articulate your long-term strategy and direct investors toward meaningful metrics and milestones that they can use to assess progress.
In addition to evaluating the value of quarterly guidance, companies should also think about how else they are meeting the demands of the modern shareholder base and demonstrate a longer-term focus; what has worked well in the past may no longer apply in today’s changed landscape. We recommend the following:
- Invest in the proxy – Even the largest institutional investors do not have enough governance professionals to sift through every page of each proxy statement under review. However, with the rise of passive funds and the increased focus on board leadership from active funds, the proxy is now the single most important communications document produced by a public company. It is increasingly imperative for companies to engage in a thoughtful, strategic and concerted engagement effort. If the “voter” is inefficient the candidate must make the voting decision easier. The proxy statement must become more than a legal process and truly be a strategic corporate investment.
- Sharpen the discussion on strategy and reinforce it annually – A well-articulated, compelling and direct strategic message is paramount to all investor relations efforts. In three sentences or less any senior leader at an organization should be able to summarize where the company is going, why it is going there and how it will get there. This message should offer credible metrics to be measured against and be updated annually or at any time it changes materially.
- Tell the Board story – Activism’s rise and the evolving modern shareholder base has put boards in the spotlight. Every company must become adept at discussing its directors’ qualifications and Board refreshment strategy, as well as making the Board increasingly accessible to investors.
- Combine Governance and IR – The corporate functions of the corporate secretary and investor relations need to become more strategically aligned. These groups have always been connected but the focus on governance at passive and now active funds means these two functions must be seen as one strategic effort.
- Conduct better “polling” – Companies need to take a multi-input approach to understanding shareholder dynamics. Solely relying on one set of inputs to understand shareholder sentiment leads to an incomplete view. Political campaigns smartly rely on a number of different tools to understand the electorate, corporate leaders should think the same way.
- Think about directors as communicators – The focus on corporate boards has added a new angle to the job description of public company directors: shareholder engagement. This is a deceptively tricky area though. Boards, alongside management, need to consider when, how and who can best represent the board’s point of view to investors.
- Anticipate ESG issues – The growth of passive investing has opened the door to investors considering structural issues that contribute to long-term value. This has started with a focus on good corporate governance but is quickly moving to a discussion on topics such as gender pay equity and environmental impact reporting. Companies should closely evaluate and monitor these topics and consider how to respond to shareholders. A poorly worded response to a shareholder proposal can shift votes quickly and cause significant reputational damage.
One size does not fit all and there are many considerations to weigh when determining how and how often to guide, but what should apply across the spectrum is that boards and investors will all benefit from refocusing on the long game.