I HAVE just updated my post from earlier this week about the disconnect between the guidance practices of public companies and the opinions of investment analysts and portfolio managers about what constitutes best practice.
IR Magazine and the National Investor Relations Institute (NIRI) say I am wrong to say IROs are more focused on short-term guidance than are analysts. You should read the update, but I want to use this post to take issue with NIRI’s claim that there has been a sharp rise in the proportion of companies that are providing earnings guidance.
I don’t believe it because it makes no sense.
Surveys lack comparability
In the news release NIRI states (emphasis added): “Sixty-four percent of NIRI members report providing earnings guidance compared to 51 percent in 2007 survey results and 66 percent in 2006, representing the reversal of a trend toward fewer companies providing earnings guidance that had developed over the last several years.”
That statement is dutifully regurgitated by IR Magazine, which headlines its story Trend away from earnings guidance reverses. CFO Magazine took the same angle earlier with a story headlined “Welcome Back, Guidance.”
But looking at the surveys in 2007 (PDF 46KB) and 2008 (PDF 111KB), they aren’t comparable. They don’t ask exactly the same things, and the 2008 survey could easily have resulted in respondents misconstruing the questions about “earnings guidance” to mean financial guidance in general.
I think the 2007 survey, which had double the response rate (24% versus 12%), is more accurate. I also think the figures for 2008 are inflated due to at least some people taking the first question on “earnings guidance” to mean financial guidance generally. I have looked at the 2006 survey and I can’t say anything bad about it.
Increasing long-term earnings guidance when there is less visibility defies logic
But you don’t really need to compare the surveys to tell you something is amiss here. If you believe NIRI, companies can’t seem to make up their minds about earnings guidance one year to the next.
Based on my experience of how slowly companies change their disclosure practices for credibility reasons, it’s very strange for companies to chop and change like that.
Especially at a time like this. It is highly unlikely that companies would provide less earnings guidance when the outlook seemed more certain (May 2007), and more earnings guidance when the future is much more murky and there is talk of a serious recession (March 2008).
Furthermore, the contention as reported by IR Magazine that guidance for “longer time frames including annual estimates account for 72 percent, up from 59 percent” also makes no sense.
Unless they don’t care about their own credibility, why would companies provide more longer-term earnings guidance at the very time that they have less visibility into the future?
My take is that earnings guidance practices are largely the same as last year or have declined slightly. Also, in my update to the earlier post I show based on NIRI’s own surveys that slightly more companies are providing shorter-term earnings guidance and fewer are providing annual earnings guidance.
Of course, I could be completely wrong and someone could well convince me otherwise, but based on my own experience and research of companies’ actual earnings release practices, I don’t think I am.
P.S. No, I’m not oblivious to the fact that writing this stuff does nothing to endear me to the IR fraternity, but this blog has always been about challenging convention and stirring debate. Frankly, I’d like nothing better than to eat crow on this topic because at least it would show that people give a damn. Sadly, I expect that this post will slowly drift down the list and be forgotten.
P.P.S. I realize NIRI is just reporting the results they get, but this isn’t the first time the results have borne little resemblance to reality. Remember when 56% of NIRI members said they planned to do a notice-and-access mailing of their proxy materials. Well, we know for a fact that few actually did. And then there are those surveys of annual report practices, where most members claim they post non-PDF versions of these documents but only about 10% actually do. Make of that what you will, but there’s clearly a believability problem here.