Administration April 4, 2003

Companies Saying No to Earnings Guidance

April 4, 2003 (PLANSPONSOR.com) - Nearly a third of all companies recently polled are considering ending the practice of offering earnings guidance.
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Overall, the survey of 609 investor relations professionals revealed more than three-quarters said their companies provide earnings guidance, but a growing number of respondents said they were considering discontinuing the practice, according to data by the National Investor Relations Institute (NIRI) reported by Dow Jones.

The majority of those considering discontinuing the practice (67%) said that the idea came from senior management.   However, 16% of corporate directors sitting on audit committees are also be getting cold feet about issuing guidance, now that panel members have greater responsibility to monitor earnings releases.

These numbers do not mean that companies will clam up with information though.   The study points out that guidance takes a number of forms, ranging from a precise estimate per share to revenue guidance to help with analyst earnings’ models.   Therefore, even companies that say they no longer give guidance may still offer up other information, such as trend data that may affect business, qualitative statements about market conditions, and quantitative information on business measures and assumptions.

Reasoning

Executives cited a plethora of reasons for discontinuing guidance, namely, the lack of “visibility” on future earnings to concerns that trying to meet projections places too much emphasis on short-term results.   Additionally, some critics have said the Wall Street earnings estimate dance helps create a mindset that leads to earnings management, and even accounting games.

One very high profile critic of the practice of earnings guidance is Securities and Exchange Commission (SEC) Chairman William Donaldson.   He believes the negative impact on shares when companies miss forecasts, creates a “terrible temptation” for executives to manipulate earnings.

Among the companies announcing new limitations on specific earnings guidance are:

  • PepsiCo Inc
  • AT&T Corp
  • McDonald’s Corp
  • Coca-Cola Co
  • Safeco Corp
  • Mattel Inc
  • Washington Post Co
  • USA Interactive
  • Gillette Co

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