Aspen Principles Aim to Stop Earnings Guidance: Hallelujah!

Judith Burns of the WSJ reports that the Center for Audit Quality has signed on to support a series of guidelines called the Aspen Principles, which aim to reduce Wall Street's obsession with short-term performance. Among the guidelines is a recommendation that companies stop giving earnings guidance, and, even more important, stop commenting on analysts earnings estimates. In other words, act like Google (GOOG).

I don't think anything will change Wall Street's ever-more-frantic trading horizons (short of the eventual realization that almost all trading hurts returns), but I couldn't agree more with the guidance recommendation. The "beat expectations" game is absurd, and the only way to begin to eliminate it is to transform analysts' estimates into actual estimates.

Back when Google went public, a chorus of whiners complained that Google's no guidance policy was going to burn investors because analysts would set estimates too high and Google would miss them, etc. All of this was really about one thing: Analysts were shocked at the thought that they might actually have to estimate. But they did. And, at first, the estimates were so low that Google blew them out, then so high that Google missed them, then just a little bit too low. And so on. And a few years later, everyone's used to wacky no-guidance Google, and life goes on.

One reason Google chose not to provide guidance--and one reason the Aspen Principles recommend against it--is that guidance forces companies into short-term thinking, too. When you know your stock will open down 30% if you miss the quarter by a penny, well, you'll damn well find that penny, even if it means sacrificing a dime or two down the road (or futzing with your accounting reserves). If, however, you establish that your earnings are going to be unpredictable and lumpy, and relentlessly refuse to provide any additional commentary, your shareholders and the market will gradually come to expect this. And you'll be able to say--and perhaps even be believed--that the reason your earnings were lower this quarter than analysts estimated is that you saw some opportunities to invest (or because, god forbid, you had a disappointing quarter. Horrors!).

Guidance is silly. Let (make) the analysts analyze. Follow in nutty Google's footsteps and make your business decisions for the long-term. If some hotshot money manager complains that he has to be accountable for quarterly performance so why shouldn't you be, tell him to buy someone else's stock.

Comments

[Paul Meisel]

I agree fully that good analysts should be able to develop reasonable estimates with public information...

And I have had too many personal experiences with "have to make the quarter" bad business decisions.