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Eliminate Earnings Guidance

by Jamie Flinchbaugh on 06-23-10

Show me the money! Or at least, show me your plans to have money in the future.

One of the most pervasive intrusions to sound strategic decision making and long-term leadership is a focus on quarterly earnings. “We must hit the number” drowns out more sensible criteria such as “what will deliver the most value to our customers?” This is equally applicable to private companies who release estimates to banks and shareholders; and the banks have only sharped their scrutiny on both estimates and actual numbers over the past 2 years.

We can’t change this culture, at least overnight, but what can we do?

Aggravating the situation is the quarterly earnings guidance that is offered regularly by most companies. Forget for a moment the waste generated by having to develop, agree on, and then communicate the guidance. The real problem is that on top of having to make each quarters’ numbers look as good as possible, the organization is focused on hitting specific numbers based on the “promises” we inherently made. Decisions are then filtered not on what they do for the business, but what they do for the number versus the promised number. That promise of the number changes everything. If you miss the number short, then your business must be headed in the wrong direction. If you exceed it by a good margin, then why did you give everyone such low-ball guidance. And worse, the market comes to expect you to beat it in the future. There really is no winning in this battle.

The best thing that can be done is simply eliminate quarterly earnings guidance. Just stop doing it. What’s the worse that can happen? Analysts and shareholders will grumble, complain, and perhaps even punish your stock a little in the short term. You will also have to get pretty skilled at dodging the questions as people continue looking for an inside angle on numbers that haven’t been released. A U.S. Chamber of Commerce independent commission even recommended the elimination of quarterly earnings guidance.

Should earnings guidance affect strategy and decision making? No, it shouldn’t. Leaders in companies should have the guts and perspective towards what is right long-term. But for those of us who have seen the behavior time and time again, eliminating this practice can improve your organizational health.

I would very much like to hear your opinion.

[Disclosure: I do not have any holdings in the stock of individual publicly-held companies.]

Comments

  • I’m very glad you wrote on this topic, Jamie. It certainly supports the TPS principle of making decisions based on long-term thinking. I was once a quality engineer for a manufacturer that took a damn-the-torpedoes approach to their quarterly earnings per share. Toward the end of each quarter one could see the battle lines drawn between the Quality and Production silos as we fought over how low we would sink to pump garbage out the door to meet the EPS target. It basically became, “Hold your nose and ship it.” I’m also glad to see the report you cited by the Chamber as supporting this notion. Unfortunately greed wins out more often than not.

    Mark Welch June 23, 2010 at 8:35 am
  • I’m very glad you wrote on this topic, Jamie. It certainly supports the TPS principle of making decisions based on long-term thinking. I was once a quality engineer for a manufacturer that took a damn-the-torpedoes approach to their quarterly earnings per share. Toward the end of each quarter one could see the battle lines drawn between the Quality and Production silos as we fought over how low we would sink to pump garbage out the door to meet the EPS target. It basically became, “Hold your nose and ship it.” I’m also glad to see the report you cited by the Chamber as supporting this notion. Unfortunately greed wins out more often than not.

    Mark Welch June 23, 2010 at 8:35 am
  • I’m very glad you wrote on this topic, Jamie. It certainly supports the TPS principle of making decisions based on long-term thinking. I was once a quality engineer for a manufacturer that took a damn-the-torpedoes approach to their quarterly earnings per share. Toward the end of each quarter one could see the battle lines drawn between the Quality and Production silos as we fought over how low we would sink to pump garbage out the door to meet the EPS target. It basically became, “Hold your nose and ship it.” I’m also glad to see the report you cited by the Chamber as supporting this notion. Unfortunately greed wins out more often than not.

    Mark Welch June 23, 2010 at 8:35 am
  • Hi Jamie,

    I wholeheartedly agree. Unfortunately, I think that we lack individual and corporate courage to ditch earnings guidance.

    I see purportedly lean, or should I say lean-aspiring companies who maintain a certain bi-polar approach. They espouse much of lean, but when it comes to the end of the month, they enjoin in self-induced mura and muri. It’s not consistent with lean principles, including respect for people, and it drives a lot of muda. It also undermines the credibility of the organization, which undermines trust (how can you tell me we need to live lean, when you do these crazy things at the end of the month/quarter?!?).

    I’m showing my considerable ignorance here, but do any of the companies that are part of the Nikkei Stock Average spurn earnings guidance?

    Mark R Hamel June 23, 2010 at 10:08 am
  • Hi Jamie,

    I wholeheartedly agree. Unfortunately, I think that we lack individual and corporate courage to ditch earnings guidance.

    I see purportedly lean, or should I say lean-aspiring companies who maintain a certain bi-polar approach. They espouse much of lean, but when it comes to the end of the month, they enjoin in self-induced mura and muri. It’s not consistent with lean principles, including respect for people, and it drives a lot of muda. It also undermines the credibility of the organization, which undermines trust (how can you tell me we need to live lean, when you do these crazy things at the end of the month/quarter?!?).

    I’m showing my considerable ignorance here, but do any of the companies that are part of the Nikkei Stock Average spurn earnings guidance?

    Mark R Hamel June 23, 2010 at 10:08 am
  • Hi Jamie,

    I wholeheartedly agree. Unfortunately, I think that we lack individual and corporate courage to ditch earnings guidance.

    I see purportedly lean, or should I say lean-aspiring companies who maintain a certain bi-polar approach. They espouse much of lean, but when it comes to the end of the month, they enjoin in self-induced mura and muri. It’s not consistent with lean principles, including respect for people, and it drives a lot of muda. It also undermines the credibility of the organization, which undermines trust (how can you tell me we need to live lean, when you do these crazy things at the end of the month/quarter?!?).

    I’m showing my considerable ignorance here, but do any of the companies that are part of the Nikkei Stock Average spurn earnings guidance?

    Mark R Hamel June 23, 2010 at 10:08 am
  • Hi Jamie

    Great point to raise. The quarterly earnings guidance serves no useful purpose other than to perpetuate the stock market game. I think Ford stopped doing this a few years ago and kudos to them. We all know how Jack Welch skillfully moved money around between different parts of GE to hit the numbers quarter after quarter.

    As long as we measure and reward people for hitting short-term targets, people will keep playing this game. Until the day comes when life science technology advances to keep us alive for 150-200 years in good health, I don’t think this will change.

    Jon Miller June 23, 2010 at 10:38 am
  • Hi Jamie

    Great point to raise. The quarterly earnings guidance serves no useful purpose other than to perpetuate the stock market game. I think Ford stopped doing this a few years ago and kudos to them. We all know how Jack Welch skillfully moved money around between different parts of GE to hit the numbers quarter after quarter.

    As long as we measure and reward people for hitting short-term targets, people will keep playing this game. Until the day comes when life science technology advances to keep us alive for 150-200 years in good health, I don’t think this will change.

    Jon Miller June 23, 2010 at 10:38 am
  • Hi Jamie

    Great point to raise. The quarterly earnings guidance serves no useful purpose other than to perpetuate the stock market game. I think Ford stopped doing this a few years ago and kudos to them. We all know how Jack Welch skillfully moved money around between different parts of GE to hit the numbers quarter after quarter.

    As long as we measure and reward people for hitting short-term targets, people will keep playing this game. Until the day comes when life science technology advances to keep us alive for 150-200 years in good health, I don’t think this will change.

    Jon Miller June 23, 2010 at 10:38 am
  • Amen! I have worked in 2 private companies, 2 public companies (one of which sold all the divisions so the main piece could be bought out), and 1 company that was private and went public while I was there.

    After all that, I much prefer the private companies. I know there are public companies that do focus long-term, but they seem to be rare. The private companies were family owned and therefore had a tendency to look long-term because their family would continue running the business. It is one less barrier to fight when going through a lean transformation and it can be a HUGE barrier. The short-term quarterly thinking is just too frustrating for me.

    Matt Wrye June 29, 2010 at 1:02 pm
  • Amen! I have worked in 2 private companies, 2 public companies (one of which sold all the divisions so the main piece could be bought out), and 1 company that was private and went public while I was there.

    After all that, I much prefer the private companies. I know there are public companies that do focus long-term, but they seem to be rare. The private companies were family owned and therefore had a tendency to look long-term because their family would continue running the business. It is one less barrier to fight when going through a lean transformation and it can be a HUGE barrier. The short-term quarterly thinking is just too frustrating for me.

    Matt Wrye June 29, 2010 at 1:02 pm
  • Amen! I have worked in 2 private companies, 2 public companies (one of which sold all the divisions so the main piece could be bought out), and 1 company that was private and went public while I was there.

    After all that, I much prefer the private companies. I know there are public companies that do focus long-term, but they seem to be rare. The private companies were family owned and therefore had a tendency to look long-term because their family would continue running the business. It is one less barrier to fight when going through a lean transformation and it can be a HUGE barrier. The short-term quarterly thinking is just too frustrating for me.

    Matt Wrye June 29, 2010 at 1:02 pm