Capital Markets

Execs Conflicted over Earnings Guidance

In a new survey, executives bemoan the amount of management time devoted to guidance efforts.
Stephen TaubMarch 8, 2006

Most executives who issue earnings guidance are not sure whether their companies gain any benefit from the exercise or what the practice costs them, says a new survey from McKinsey & Co.

Yet despite a lack of conviction, 83 percent do not plan to alter their policy on earnings guidance, the comments provided by management about how a company will perform in the future. The survey findings suggest that most executives continue to issue earnings guidance “in the absence of any clear consensus on its contribution to company value and largely at the insistence of brokerage house analysts.”

More than three-quarters of the 124 survey respondents said that their companies issue earnings guidance to investors; 48 percent do so quarterly. Survey participants included chief executive officers, chief financial officers, and board members of publicly held companies.

About 25 percent confirmed that their companies have increased the frequency of earnings guidance in the past three years; 66 percent reported that their companies haven’t changed the frequency.

Of the executives whose companies currently provide guidance, 76 percent noted that the practice helps to satisfy requests from investors and analysts, while slightly fewer said it helps them maintain a channel of communication with investors. In addition, 56 percent said that issuing guidance intensifies management’s focus on achieving financial targets.

Yet some companies don’t offer earnings guidance at all, including Google, Berkshire Hathaway, Citigroup, and Ford Motor Co. To be sure, earnings guidance is believed to play a big role in fostering the short-term mentality among investors that most companies abhor. Other companies may not like the cost associated with the practice.

For example, 53 percent of the respondents bemoaned the amount of management time taken up by earnings guidance efforts; 43 percent complained that guidance focuses investors on short-term results.

What would happen if companies that are currently issuing guidance reduced the frequency of their comments? Some 46 percent of survey respondents fretted that their company would have less visibility because analysts would reduce coverage, while 41 percent said they believe their company’s share price would become more volatile.

If companies ceased issuing guidance altogether, 56 percent of respondents believe that their company would have less visibility due to a reduction in analyst coverage, and 46 percent believe their company’s stock price would become more volatile.