Refreshing Change at Coke
In the increasingly complex world of corporate finance, quarterly earnings reports are the equivalent of short-term weather forecasts that ignore savage winter storms building over the Pacific Ocean. Yes, investors deserve to know where the company is heading. But what good is a rosy fourth-quarter report if the company jeopardizes its long-term financial health to finance it?
Coca-Cola Corp. endorsed that longer-term view a few days ago, saying it would no longer generate quarterly earnings forecasts for Wall Street analysts. By refusing to feed Wall Street’s insatiable demand for “earnings guidance,” one of the country’s most familiar brands has joined Intel Corp., Gillette Co. and the handful of respected companies on a frustratingly short list of publicly traded companies that view earnings forecasts as doing more harm than good.
Quarterly reports also can hide more than they reveal. Executives know how to understate expectations during tough times and hold back some of the good news when times are good. And, too often, earnings predictions become a self-fulfilling prophecy. Once estimates are made public, executives are under intense pressure to slash operating costs to hit the quarterly target.
That short-term mentality can hurt shareholders in other ways. Managers and workers at non-financial Standard & Poor’s 500 businesses netted more than $100 billion during 2000 from stock options, according to Business Week magazine. Call it a clear case of management by objective -- the goal being to focus on short-term results in order to produce a pot of gold at the end of the options rainbow.
No one will mistake Warren Buffett, Coca-Cola’s largest single shareholder -- who also is on the Gillette board -- for a short-term player. Buffett is chairman of Berkshire Hathaway Inc., which has long refused to play the earnings estimate game. This year Buffett persuaded Coca-Cola to list employee stock options as an expense so shareholders know the costs upfront.
If companies abandon their “best guesses” about the near-term profit picture, industry analysts will have to work harder to divine which companies deserve “buy” recommendations. Good. Let them earn their keep by researching the fundamental ways companies are run. Investors will have to expand their investment horizons. Also good because the longer-term focus should lead to less-volatile markets.
The strategy is not without loopholes. Abandoning short-term earnings predictions won’t benefit shareholders if corporations instead try to obfuscate potential problems further down the road. But it does remove some of the temptations to which companies like Enron Corp. succumbed.
