End to Short-Term Forecasts Is Urged

Two influential think tanks called on companies Monday to stop giving quarterly earnings forecasts, saying they lead to a focus on short-term stock prices instead of long-term value.

The recommendations were made by the Business Roundtable Institute for Corporate Ethics and by the CFA Centre for Financial Market Integrity, the policy arm of the CFA Institute, which administers the Chartered Financial Analyst program for analysts and portfolio managers worldwide.

The groups suggested that companies develop more frequent updates on strategy or other long-term growth drivers to replace short-term earnings guidance.

“Twenty years ago, there really wasn’t much of any of this, and I think now ... companies feel that, if they don’t have an earnings target out there that they can beat, they are going to get punished,” said Matthew Orsagh, an analyst at the CFA center.

The recommendations follow a report in March by consulting firm McKinsey & Co., titled “The Misguided Practice of Earnings Guidance,” which said companies that stop giving quarterly guidance did not necessarily have more volatile stocks.

Since Coca-Cola Co. announced in 2002 that it would stop giving quarterly and annual earnings-per-share guidance, companies have been debating the merits of the practice.

Many companies have followed Coke’s lead: According to surveys by the National Investor Relations Institute, the percentage of companies providing quarterly guidance has dropped to 52% from 75% in 2003.

Critics say eliminating short-term guidance would reduce corporate transparency. But the think tanks say the market’s obsession with short-term earnings forecasts has led to a one-size-fits all approach, wherein every company is expected to give quarterly earnings guidance even if other measures might give investors more insight into how the business is faring.