Q My management team is against giving formal guidance but the board is pressing it to offer more directional guidance. Which side should I support?
A There is no one-size-fits-all answer for questions dealing with providing guidance; it is a subjective decision for firms in both good and bad times. However, accountability and transparency are at the heart of the debate. Public companies have no option but to be accountable for the decisions they make and provide investors with a transparent view of the business. Not to treat investors as owners and partners in the future success of the company is like telling them to go invest their money elsewhere.
I am very much in favor of companies providing directional guidance, in all of its forms, whenever and wherever they can. If management teams are not able and/or willing to do this, they send a message to investors – and many other constituencies – that they are not in control, which will result in a loss of credibility.
Q I find it ironic that some of the newly public alternative investment funds have been able to raise billions despite stating that they wouldn’t offer investors earnings guidance. How can they get away with this?
A This is part of a justifiable backlash against essentially having to manage each quarter down to a penny to meet guidance. The financial media and sell-side analyst communities have been so fixated on companies meeting their bottom-line numbers that true performance is obscured.
A company could double its revenue, net income and margins but miss an aggressive consensus number (which it may have never provided), and the first thing it reads in the papers is that it has disappointed the Street and missed its consensus number.
Firms dropping guidance are emphasizing that they are managing for the long term, even if it means uneven quarterly performance. They shift the focus to the performance of the management team, the business strategy and measurable progress toward corporate goals. If we could get all investors and the media to understand this, we might see some enormous long-term benefits, not only for investors and communicators, but also for the economy.
