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A Question of Terms
Posted by Tim Reason | | US
March 30, 2006 7:11 AM ET

Half of the duo that brought you Sarbanes-Oxley wants your company to focus on the long-term by stopping quarterly earnings guidance . . . and, um, moving to real-time disclosure.

At a Congressional hearing yesterday on "Fostering Accuracy and Transparency in Financial Reporting," Rep. Michael Oxley commended the US Chamber of Commerce "for encouraging its public company members to cease issuing quarterly earnings guidance." It's too tempting, he said, to try to manage the business to meet those short-term targets. "[M]anagement and investors need to focus on long-term company health," he said.

Makes sense, right? But here's where he lost me: "One way, perhaps, to distance ourselves from relying on these quarterly earnings forecasts, is to make progress toward real-time disclosure."

My first reaction: How is real-time disclosure going to focus investors on the long-term? Instead of stock swings after every 10Q earnings call, wouldn't investors react to every bump in the numbers? Heck, is it so far-fetched to think that with help from XBRL, they could even have automated buying and selling based on real-time disclosure?

In fact, that's almost exactly how SEC Chairman Cox described it in a speech to the Securities Industry Association last November: "Those RSS feeds you can now get on your desktop from almost every financial publication? No problem. Think SEC web feeds, direct to your desktop, with automatic robotic web searches all conducted in the background, in real time. And why stop there? Your computer can use this real-time data to automatically assemble your favorite ratios and instantly pop them up on a toolbar."

Indeed, in his testimony, the Chamber's David Hirschmann was careful to say "XBRL will help everyone to better assess financial statements, but the smart money will still take the time to carefully understand industry factors and long-term strategy."

Again, makes sense. But let's be real here some smart money chases long-term profits, and some smart money chases short-term profits.

Comments (2)

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Just to clarify — beyond some obvious practical challenges, I don't have any particular objection to the idea of real-time disclosure. It's just that logically, it's not a fit in the same paragraph as getting rid of earnings guidance so investors focus on the long-term.

Real-time disclosure and ending earnings guidance are two different animals with two different goals. The first is a question of transparency, the second is a question of performance management.

Posted by CFO Staff: Tim Reason | March 30, 2006 09:00am

As a management scientist, I cannot wait to use this issue as an example in perspective failure. You have short-term targets and long-term goals. The former are quantifiable; the latter perhaps not so. So Rep. Oxley wants to encourage longer-range thought and management by eliminating short-term targets.

Hmm. Today, I need to drop off my dry-cleaning and stop by the supermarket. Long-range, I want to retire in Bali. In Oxley's strange concept-space, in order to get to Bali, I must first drive blind-folded to Krogers.

That's nuts, of course. If you want to achieve your long-term goals, the best thing you can do is announce your short-term targets. You are less likely to miss a step that way.
Posted by George Brown | March 31, 2006 05:22am

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