Less does not equal more in the realm of investor relations.
Recently, Warren Buffett and Jamie Dimon issued a call for companies to embrace the mantra of less is more. They believe that companies should eliminate the quarterly earnings forecast. Management teams are likely jumping for joy at such a clarion call.
However, management teams need to find the discipline to resist the urge to follow such temptations. Limiting information flow by eliminating quarterly forecasts will not remove excess stock volatility driven by a suboptimal investor relations program. Let’s face it, most IR programs fail to provide a level of detail requisite to forego quarterly earnings forecasts.
For as long as sell-side research has existed, management teams have likely eschewed the process of quarterly earnings forecasts. The primary complaint revolves around the idea that with quarterly forecasts, the company must manage expectations on a quarterly basis. If this is your complaint, then you already have lost the investing war. Remember, not providing forecasts cedes control of your corporate narrative to the investor community.
Being a public company means convincing the investment community that management continuously makes the best day-to-day decisions to operate the business. Opposition or debate should not be taken as a reason necessarily to change course, or even dictate how management operates.
At the end of the day, a company must own its decisions, or it will always face extreme volatility in share price. If management does not own its decisions, and the Investor Relations Program fails to convince investors management makes the right decisions on a day-to-day basis, providing less information will not help smooth price volatility, rather it will inject considerably more.
Buffett and Dimon Call for an End to Quarterly Guidance
Late last week, both Warren Buffett and Jamie Dimon publicly called for the end of quarterly earnings forecasts. Watch the video here. You can read about it here at the New York Times. While I completely understand the sentiment here, I believe the clarion call is the wrong approach for the majority of publicly traded companies.
Companies do better when they issue more disclosures and information to help investors understand their story not less. In my view, the problem of volatility is two-fold (1) have you optimized your investor materials, and (2) does management own its day-to-day operating decisions.
The argument revolves around the belief that quarterly earnings guidance causes management teams to make poor decisions. The C-suite gets focused on the rat race of meeting some esoteric metric in a given quarter rather than a full year. So, don’t give profit forecasts but give detailed earnings releases. Unfortunately, most companies give quarterly guidance, and the majority fail to provide detailed earnings releases.
Optimization and Ownership
The real fundamental problem revolves around (1) a lack of optimized investor materials, and (2) management teams not owning their decisions. A major problem overlooked by the proponents of killing quarterly guidance revolves around investor materials. The prevailing belief in investor relations and C-suites seems to hold that a passive approach to investor relations is best.
What does a passive approach entail?
It means providing a bare-bones earnings release with minimal disclosures. Thank you, Internet companies, for setting this standard back in the early 2000s. A passive approach entails no earnings deck to illustrate the change over time in key financial metrics. Additionally, a passive approach fails to provide an investor deck, which allows investors to quickly gain a basic understanding of your story. Ultimately, a passive IR program waits for investors to engage rather than creating a call to action.
Optimize Your Investor Materials
All too often companies immediately look to limit guidance in times of difficulty, change, or trouble. The focus almost never falls on optimizing the company’s investor materials. If a company operates a passive IR program or suffers from the Ferris Bueller problem of IR, then limiting guidance will inject more volatility. We advocate focusing on optimizing your investor materials before looking to limit information disclosure.
Does the company offer an investor deck for the investment community to begin their due diligence? Is the earnings call focusing on the golden metrics of key topics that actually matter to investors? Does the company provide an earnings release that goes beyond just the summary financial statements? What about an earnings deck that illustrates the change over time in key metrics? Lastly, are you doing call backs and actively seeking investor meetings? If you answered no to any or all of these questions, then eliminating quarterly earnings guidance will do very little to smooth volatility.
Owning Operational Decision Making
The two questions that strike fear in the hearts of executives everywhere.
What will the investors say? What will the board say?
Who cares what they will say.
Management’s job is to run a business by making optimal operating decisions. The investor relations program must convince the Street that management continuously makes the right decisions on a day-to-day basis to operate the company optimally. Management needs to be confident enough to make the day-to-day operational decisions to run a business, otherwise nothing we describe here can help.
Push back on operational decisions and strategy represents debate fundamental to being a public company. If you do not want scrutiny or to be judged on performance, or you do not want to tell investors about your progress, why go public?
Based on my Sell-Side experience, when a company seeks to limit guidance, it is a strong signal that there is a huge underlying problem. The problem most likely revolves around someone in the organization not performing to the standard of being a public company, either at the executive level or across the entirety of the organization. The alternative is that those operating the business seek a level of control that closes them off to any type of scrutiny.
Call for Passive Investing?
When one considers the clarion call to stop quarterly earnings guidance, both Buffett and Dimon are implicitly validating passive investing. I am not sure the CEO of JP Morgan really wants to argue that passive investing is the best course of action.
Remember less does not equal more in the investor relations realm. The smaller, more complex, or lesser stature of your company, the more work the IRO needs to put in to get investors to care. Eliminating earnings guidance will only make the IRO’s job harder, and at the same time likely inject additional volatility into shares. If you eliminate both quarterly and annual earnings guidance, how the hell do you analyze a company?
This is ludacris!
Yeah, yeah, yeah, yeah
Give me that earnings guidance, give me that guidance now
Give me that earnings guidance, give me that guidance now
I wanna, an-a-ly-ze you from the top to the bottom line
And I wanna, move from revenues down to the down to EBITDA
Then I wanna, ahh ahh – see free cash flow so good I’ll buy your stock for anything!
But I gotta, kn-kn-kn know what-what’s your earnings will be!
