Eliminate Earnings Guidance
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.]