Warren Buffett and Jamie Dimon have teamed up to once again call for the end to quarterly earnings guidance by companies.
Dimon, the chairman of the Business Roundtable, said the group of CEOs has thrown its support behind companies backing away from the practice.
Executives often feel pressure to make quarterly forecasts, but “it can often put a company in a position where management from the CEO down feels obligated to deliver earnings and therefore may do things that they wouldn’t otherwise have done,” Dimon said in a rare joint interview with Buffett airing Thursday on CNBC’s Squawk Box.
Dimon, the chairman and CEO of J. P. Morgan Chase, and Buffett, chairman and CEO of Berkshire Hathaway, wrote about the group’s endorsement in an opinion column in The Wall Street Journal.
It is a long-simmering debate but one that has gotten more attention in an era when activist investors are more vocal about pushing companies to deliver on their promises.
Companies forecast sales and profit numbers to Wall Street analysts, who use it to produce research and stock recommendations for investors. Missing “the number” can often result in big, short-term stock moves. Making a forecast, and then hitting the target, are seen as a way to manage expectations and eliminate volatility.
Buffett’s Berkshire Hathaway doesn’t give guidance, which Buffett has said can tempt executives to manipulate numbers to meet Street expectations.
It’s “sending the wrong message,” Buffett told CNBC’s Becky Quick in the interview. “When companies get where they’re sort of living by so-called making the numbers, they do a lot of things that really are counter to the long-term interests of the business.”
Buffett and Dimon helped produce a set of voluntary governance guidelines two years ago, which was signed by more than one dozen executives. One of the principles outlined in that report said companies shouldn’t feel obligated to give quarterly guidance, which for years many have blamed for making executives obsessed with short-term results.
Those in favor of guidance say it improves communications with Wall Street, reduces share price volatility and boosts a stock’s value.
But McKinsey & Co. found in a 2006 study that quarterly guidance didn’t affect valuation multiples and didn’t reduce share price volatility. The only significant benefit it observed was an increase in trading volumes, which is good for day traders but not useful for most other people.
Instead, McKinsey found, the practice of giving quarterly guidance took up valuable time from management and made them focus too much on the short term. Around that time, big companies like Coca Cola, UPS and AT&T said they would no longer give quarterly guidance.
Dimon said Thursday that about 20 percent of Business Roundtable members still do quarterly guidance and about 60 percent provide annual targets. But, he added, taking a stand on the issue is “a first step.”
