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Ten questions for Chuck Hill, former director of research at Thomson Financial First Call.
CFO Staff, CFO Magazine
May 1, 2004
As director of research at Thomson Financial First Call, Chuck Hill helped make consensus numbers, analysts' collective forecast of earnings expectations, a critical factor in investment decisions. His lucid analysis of corporate performance relative to these numbers helped inform scores of investors. Although ousted in a restructuring move in March, the well-respected Hill still has plenty to say about earnings, disclosures, guidance, and regulation.
1. Were you surprised at how important the consensus numbers — or the mean numbers, as they are now called — became?
They have certainly become more important. In the early days, the data was disorganized and unreliable. So you couldn't talk about [how a company] missed by a penny or missed by a nickel. But as technology improved, it enabled us to collect data in a more timely fashion, and to disseminate it more widely.
Now, is that a good thing? No. The market shouldn't care so much about whether somebody missed by a penny.
2. How would you change that emphasis?
CFOs need to look in the mirror. They whine about the market being shortsighted, and part of the problem is [the emphasis on] quarterly earnings. But other factors also contribute to short-term focus.
3. So CFOs have a responsibility to change the market's short-term focus?
That's right. They can't do it alone, of course, but they can certainly accentuate the longer-term outlook in every release they put out about the short-term.
4. What else should they emphasize?
Neither companies, nor analysts for that matter, emphasize the future five-year average annual earnings growth rate enough. It's a matter of scorekeeping. If a company changes its five-year growth rate from 15 percent to 13 percent, analysts can't judge it for several years. But lowering the quarterly earnings number from 0.15 cents to 0.13 cents becomes big news in a month or so.
5. What do you consider appropriate guidance?
Companies should create separate guidance policies for the current period versus subsequent periods. Information in the current period, particularly here in the United States, is all in the companies' hands. My thesis is, let it all hang out about what you know, not what you think you're going to do, or what the plan is for the quarter.
6. How reliable is the analyst community these days?
It's much better. First of all, we've weeded out a lot of the high-paid stenographers. Some of the ones who didn't get weeded out have gotten the message that they'd better start doing what an analyst is supposed to do. People are reading balance sheets again, talking to competitors and suppliers, and doing independent research. They're being better gatekeepers on what gets excluded to get from the GAAP number to the so-called operating or pro forma earnings number. Still, as long as research is not economically viable on its own, there will be a conflict, however implied rather than direct it may be.
7. Has the Sarbanes-Oxley Act of 2002 had any impact on companies pushing their results to make the mean numbers?
Sarbanes-Oxley has put the fear of God into people. And even though there's no way to measure it, I do think that we're not seeing [overt fudging] going on. But you know, usually we don't know whether or not a reform has worked until another scandal bubbles up.
8. There have been reports of whisper numbers again. Does that worry you?
It's a little troublesome. But hopefully companies and analysts will ignore them.
9. Will filing earlier because of Sarbox requirements lead to more mistakes?
Inevitably. But any additional mistakes are far outweighed by the benefits of communicating the information sooner.
10. Are you more comfortable with the quality of the corporate information available today?
Sure! Would I have felt a little more comfortable at this point in the cycle even if we hadn't had Sarbox? Yes, because we would have seen a market correction — people behaving better. But Sarbox has been a net positive. Given where and how quickly it was written, we were damn lucky.
Interview by Lori Calabro