This question is not as innocuous as it might at first seem. According to those who study the matter, it may become part of a larger debate in 2006 about added pressures on managers to produce short-term earnings regardless of the impact on the long-term health of the business.
In his annual year-end letter to directors, Martin Lipton, a long-time student of corporate governance, cites the issue as one of the three most important issues facing managers and directors in 2006. He commented that, "Activist shareholders, led by hedge funds which today have aggregate assets of more than one trillion dollars and armed with the threat of withhold-the-vote campaigns against directors, will exacerbate the tension between short-term performance and long-term success of the corporation…. While different in form, this hedge fund pressure raises management and board issues similar to those created by the pressure to give quarterly earnings guidance and then meet the targets."
In a 2002 article in Fortune magazine, Daniel Vasella, CEO of Novartis, weighed in on the guidance issue: "The practice by which CEOs offer guidance about their expected quarterly earnings performance, analysts set 'targets' based on that guidance, and then companies try to meet those targets within the penny is an old one. But in recent years the practice has become so enshrined in the culture of Wall Street that the men and women running public companies often think of little else. They become preoccupied with short-term 'success,' a mindset that can hamper or even destroy long-term performance for shareholders." Perhaps with this in mind, a small but growing number of public company CEOs are electing not to provide earnings guidance, risking reduced interest on the part of analysts and possibly less publicity for their companies.
But this raises several questions. If this is the age of transparency, why shouldn't CEOs provide as much information as possible, including quarterly and annual business projections, in the interest of better information to investors? Isn't this part of the "perfect information" that markets (as opposed to individual investors) are often assumed to possess? On the other hand, haven't European markets and investors functioned just as well without very much forward guidance from management? Aren't diligent analysts able to come up with reasonably accurate projections without the assistance of management? Is it possible that the short-term pressure to meet public targets set by CEOs and analysts is beneficial to long-term performance as well? On balance, how does the practice affect investors? How should CEOs respond?
Is it coincidental that these questions are arising at precisely the time that the Securities and Exchange Commission is advocating disclosure of CEO pay packages, including the value of large stock option grants which many might conclude produce similar pressures for short-term performance? What do you think? 