As we’ve reported during the past few months, a number of large-cap companies—including Coke, McDonalds, and AT&T—have announced their intention to stop providing earnings guidance to investors (see “Nothing But the Real Thing”). Now comes yet another indication that guidance may be headed for the scrap heap.
A recent survey of 600 investor-relations executives reveals that nearly a third of the respondents said their employers are considering ending the practice of offering profit projections to Wall Street analysts.
Executives in the survey, which was conducted by the National Investor Relations Institute (NIRI), cited a variety of reasons for putting an end to the guidance game.
High on the list of concerns: meeting earnings targets simply places too much emphasis on achieving short-term results. Some critics—and in particular, governance-rights activists—claim that the pressure to meet earnings projections provides an impetus for earnings management and the use of accounting gimmicks. Because the market tends to punish companies that miss forecasts by pushing share prices down, there is a big incentive, these critics maintain, for companies to make their numbers—any way they can.
Leaving forecasting to analysts and market prognosticators, they claim, could help restore investor confidence in corporate accounting.
In the wake of Sarbanes-Oxley—and given what happens when companies miss their targets—it’s not surprising that senior managers are looking to mitigate potential areas of exposure. Indeed, 67 percent of survey respondents said the idea to consider discontinuing guidance came from senior management. Sixteen percent reported that their board of directors first raised the issue.
That’s not a stunner, considering that audit-committee members now have greater responsibility to monitor earnings releases and endorse the accuracy of the projections.
Despite the apparent dislike among senior executives for providing earnings estimates, it is unlikely that they will withhold other types of information used to guide investors. The NIRI survey shows that most companies will continue to provide forward-looking information, such as trend data that may affect business, qualitative statements about market conditions, and quantitative information on business measures and assumptions.
Past that, it appears that corporate managers are now more willing to let Wall Street analysts do what they get paid to do.
Survey: Property Premiums to Drop
There’s been a seemingly endless parade of bad news coming from Corporate America. But here’s some rare good news.
A new survey by Aon Corp., the world’s second-largest insurance broker, indicates that prices for U.S. commercial-property insurance have begun to steady—and in some cases, even come down. In a few instances, rates have declined by as much as 20 percent.
Following a highly competitive, low-premium rate environment in the 1990s, commercial real-estate insurance prices began to increase in 2000. After the terrorist attacks of September 11, those prices increased dramatically. Property-insurance rates rose a whopping 67 percent on average in the year following 9/11.
According to the survey, limits were down 47 percent in 2002, while deductibles increased by 100 percent. Barring any shock loss due to either natural catastrophe or terrorist attack, or significant impact from a major company failure or ratings downgrade, the property market will moderate in 2003, according to Aon.
Why? Well, most global insurers have been struggling with declining investment rates and the need to cut losses, and that’s kept rates high across most insurance classes. But an increase in capacity—and more intense competition for business—has kept property prices in check. “The U.S. property market appears to be bucking the trend,” said John Turner, chairman of Aon’s U.K. Global Risks division.
“Evidence is emerging that the market is on the brink of a downward cycle,” the Aon report said. “It is probably only being held up by management discipline among insurers who are committed to returning healthy profits on their underwriting.” Should this discipline break in the face of stiff competition, rates are likely to continue to fall in the coming 12 months, Aon analysts contend.
Although property prices are on a downward trend, underwriters remain selective in their choice of new clients, the Aon survey indicates. New business continues to be quoted on a case-by-case basis, and is contingent on a carrier’s appetite for risk.
Interestingly, the survey showed that neither insurers nor insureds are thrilled by the U.S. Terrorism Risk Insurance Act. According to Gary Marchitello, managing director of Aon’s National Property Syndication in the United States, many corporates say the act does not provide adequate coverage.
(Editor’s note: to see if the turbulent insurance market could undermine your company’s coverage, read “How Sure Is Your Insurance?”)
More Quality Time for Audit Committees
Just a week after the Securities and Exchange Commission voted to strengthen audit-committee independence, a report in the Financial Times says audit-committee members at large U.S. corporations are spending a lot more time together these days.
According to an FT analysis of the regulatory filings of the 30 companies that comprise the Dow Jones Industrial Average, audit committees at those corporations met nearly 50 percent more frequently last year than they did in 2001.
Intel, for instance, held 10 audit-committee meetings last year, compared with three in 2001. The number of audit-committee meetings at aircraft maker Boeing doubled to 12 in 2002. JP Morgan Chase and Citigroup held 11 audit-committee meetings, up from seven and eight, respectively, in 2001.
What’s more, as managers of the largest U.S. companies step up their efforts to improve governance and the quality of their financial statements, a number of companies that did not have a corporate-governance committee in 2001 added one last year, according to the FT.
Corporate-governance advocates see a greater commitment to audit-committee meetings as a step in the right direction, and point to instances of sporadic activity as indicators of potential trouble. In 2001, for example, auditors at HealthSouth met separately from the company’s board only once.
Last month, the Birmingham, Alabama-based HealthSouth announced that the SEC and Department of Justice were investigating the company’s financial reporting. Several finance department staffers, including HealthSouth’s two previous CFOs, have reportedly pleaded guilty to participating in a scheme to help artificially boost that company’s earnings over a period of several years.
Although more audit-committee scrutiny may help uncover accounting mistakes, outright fraud is likely to remain difficult to spot, observers say. “It’s clear that if the CEO and the outside auditor wanted to hide information they could do it and the board wouldn’t know,” Roger Raber, president of the National Association of Corporate Directors, told the FT.
Waste Management Lawyer Named CFO
Waste Management Inc. has selected an internal candidate to fill the finance chief post vacated more than nine months ago.
David Steiner, who was Waste Management’s senior vice president, general counsel, and corporate secretary, has been named to head up the company’s finance department. Steiner joined Houston-based Waste Management in November 2000 as vice president and deputy general counsel. He has been senior vice president and general counsel since July 2001.
Prior to that, Steiner worked as a corporate finance attorney at Phelps Dunbar, a New Orleans law firm. He is a graduate of Louisiana State University, with an undergraduate degree in accounting. Steiner also holds a law degree from the University of California Law School at Los Angeles.
In another promotion, Robert Simpson, chief accounting officer, was appointed senior vice president at Waste Management.
Given the protracted search for a new CFO, some observers predicted the company would hire an outsider with a propensity for cost-cutting. They were wrong. Said CEO Maurice Myers: “I am extremely pleased that we have been able to fill this critical position with an in-house candidate.”
Investors seemed less pleased with the announcement, however. After Steiner’s selection was made public, Waste Management’s stock price slid 3 percent.