At one point or another, those who keep track of the financial markets might have doubted the credibility of quarterly guidance issued by companies. The financial outlook provided by CEOs has long been a metric widely used for evaluating future performance of the companies they lead.
Now, the relevance of earnings guidance is being questioned by none other than Wall Street veteran Warren Buffett, who has teamed up with Jamie Dimon, head of JPMorgan Chase, to urge CEOs to stop the practice of issuing earnings outlook.
According to the duo, a few CEOs have pledged support to their initiative. Buffett is of the view that since profitability depends on various unpredictable factors, it is nearly impossible for managements to forecast what is in store for the company in the coming months.
A couple of years ago, a group of CEOs had signed a set of voluntary governance guidelines created under an initiative by Buffett and Dimon. An important principle outlined in that document was that ‘companies shouldn’t feel obligated to give quarterly guidance.’
“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 in told a CNBC reporter during an interview. His views assume significance considering the emerging trend of activist investors putting pressure on companies to meet their earnings targets.
Buffett believes it is not possible for CEOs to forecast what is in store for the company
In general, those who oppose the practice of corporates announcing financial forecasts are of the view that quite often those at the helm of affairs tend to act with short-term goals, which they might have avoided if not obliged to deliver on the guidance.
Calling quarterly earnings a function of weather, volumes and competitor pricing, Dimon said such factors cannot be controlled by any CEO. “Sometimes you’re just like the cork in the ocean, but do the right thing anyway and you’re going to be fine in the long run,” he added.
It is likely that the comments of the two financial market doyens might enliven the ongoing debate on the topic, prompting experts to revisit the concept of analysts making recommendations to investors based on guidance provided by companies. Variations in the actual earnings performances in comparison with the estimates often result in short-term stock moves.
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