Since 2005, research has consistently found that the vast majority of corporate executives think that short-term pressure is growing, that it is changing their business decisions, and that those changes are destroying value.
But what can executive teams do to fight short-term pressure?
One way is to move away from quarterly earnings per share (EPS) guidance. Previous research by KKS suggests that issuing quarterly earnings guidance contributes to this short-term focus, and that the costs of producing it are likely to outweigh the benefits.
Our team provided research for the latest FCLT report, comparing guidance policies for 799 firms from the S&P500 and Euro Stoxx 300 for the period 2010-2016.
In our sample of S&P500 companies, just 28% gave quarterly EPS guidance in 2016, with 31% giving annual guidance and 41% giving no EPS guidance at all. And even more striking: of the companies in the Euro Stoxx 300 sample, fewer than 1% gave quarterly EPS guidance in 2016. The graph below shows the decline in EPS guidance use over the last six years.
So why produce it at all? Advocates of the quarterly guidance practice believe that it helps companies with improving their valuation due to a ‘management credibility’ premium, and helps reduce volatility by managing investor expectations.
Our research has shown that neither of these arguments hold true. We found that guidance policy had no effect on valuation whatsoever. As for the claim that it reduces volatility, we found that the opposite is true, companies offering annual range EPS guidance over the same period experienced lower volatility around earnings reporting periods when compared with those that issued quarterly guidance.
The report also busts some other common myths around quarterly guidance – summarized in the table below.
Our research shows that long-term investors do not need a lot of detailed guidance about quarterly numbers.
What they do need is consistency and transparency from managers in communicating strategic priorities and their long-term expectations. FCLT Global recommends a long-term roadmap as the new normal for investor communications to replace quarterly EPS Guidance.
You can read more in the full report.
Do you know any CEOs or investment teams who should look to change their practices? Tag them below.