Earlier this month, The Wall Street Journal ran an opinion, co-authored by Jamie Dimon, chair and CEO of JPMorgan Chase & Co., and Warren Buffett, chair of Berkshire Hathaway Inc., titled "Short-Termism Is Harming the Economy."
It made quite a splash, with lots of pundits opining that maybe these guys were onto something.
The truth is Buffett and Dimon's opinion is without merit. Worse, it's dangerous.
The "short-termism" they claim is harming the economy manifests itself in earnings guidance from managers of public companies.
As if CEOs' and CFOs' earnings guidance impacts America's $19.4 trillion economy. It doesn't.
The authors state, "Today, together with Business Roundtable, an association of nearly 200 chief executive officers from major U.S. companies, we are encouraging all public companies to consider moving away from providing quarterly earnings-per-share guidance. In our experience, quarterly earnings guidance often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth, and sustainability."
It's a bait-and-switch - they want you to "watch the birdie."
Because what the authors really want to do away with isn't just earnings guidance... It's earnings reporting.
That's not my opinion: That's exactly what they've been advocating.
And it's not even close to being in investors' (which is to say our) best interests.
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The Big Difference Between Guidance and Reporting
Regulations covering U.S.-listed, publicly traded companies require them to report their earnings, along with a host of standard metrics, quarterly - as in: Four. Times. A. Year.
Whether a company's accounting is based on a calendar year or a fiscal year of its choosing, quarterly still means every three months from Jan. 1 or the first day of a fiscal calendar.
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Quarterly earnings, however, aren't the norm in Europe.
In 2013, the European Commission amended its Transparency Directive, abolishing the regulatory requirement that public companies report earnings quarterly, in favor of a semi-annual schedule.
That's what Mr. Dimon, Mr. Buffett, and the Business Roundtable are after. They want the United States to adopt the European earnings-reporting schedule.
Citing the negative impact of "short-termism" having to report earnings quarterly, they said:
"These principles acknowledge that the financial markets have become too focused on the short term. Quarterly earnings-per-share guidance is a major driver of this trend and contributes to a shift away from long-term investments. Companies frequently hold back on technology spending, hiring, and research and development to meet quarterly earnings forecasts that may be affected by factors outside the company's control, such as commodity-price fluctuations, stock-market volatility, and even the weather."
It is true, financial markets are very focused, perhaps even too focused, on quarterly earnings.
But, "quarterly earnings-per-share guidance" isn't a "major driver of that trend," as they say. It's that companies must report earnings quarterly that they are really attacking.
There's a difference. Neither companies nor CEOs nor CFOs are compelled to give quarterly earnings guidance. That's not a regulatory requirement; it's nowhere written in stone.
What's more, many companies don't offer earnings guidance. They let their quarterly numbers speak for themselves and let analysts just analyze and estimate away to their hearts' content, without guiding them.
Quarterly earnings guidance is simply a game managers play with analysts. The game is about managing their stocks' reactions to their earnings when they report them.
Managers will "talk down" earnings in the future in order to bring down consensus estimates. Of course, this makes it that much easier for the company to score a "beat" on announcement day, which will usually cause the stock to pop higher.
Get this: A recent report by S&P Capital IQ showed that from January 2003 through February 2015, management guidance effectively caused analysts to lower their consensus estimates 70% of the time, making actual earnings "beats" significantly easier.
So this isn't about the wise and noble long view versus feckless, stupid short-termism; it's about stock-price management.
There's No Evidence Supporting Buffett and Dimon Here
What's worse (and more disingenuous) in the opinion piece is this statement: "The pressure to meet short-term earnings estimates has contributed to the decline in the number of public companies in America over the past two decades."
There is no empirical evidence to support that statement. None.
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Their opinion is also that "Short-term-oriented capital markets have discouraged companies with a longer-term view from going public at all, depriving the economy of innovation and opportunity."
That, again, is unsupported by any empirical evidence. There's plenty of evidence to the contrary, though, in the form of "unicorns."
So-called "unicorns" (private companies backed by venture capitalists with a greater than $1 billion value) and other large private companies with lots of investors are only waiting to go public at the right time, when their value and brands are so compelling that public investors will eat them up.
That's how venture capital, early stage, and subsequent-round investors cash out, by going public. It's one of the most important ways innovation and opportunity tap into the economy.
The nonsense that quarterly earnings guidance on its own is any kind of negative for the economy or the investors that live and die in it is debunked in "Is Silence Golden? An Empirical Analysis of Firms that Stop Giving Quarterly Earnings Guidance," a well-researched report by Shuping Chen of the University of Texas at Austin - Red McCombs School of Business, Dawn A. Matsumoto of the University of Washington - Department of Accounting, and Shivaram Rajgopal of Columbia Business School.
It wasn't meant to be, necessarily, but it reads like a perfect, point-by-point rebuttal to Buffett, Dimon, and the Business Roundtable's claims. And, unlike "Short-Termism, Is Silence Golden," it is backed by plenty of evidence.
In short, the report finds: "The primary driver behind the decision to stop guidance is not to focus investors on the long-term, as many firms claim. We also find that the elimination of guidance results in stock prices reflecting earnings news slower than when guidance is provided (i.e., that prices lead earnings less once guidance is eliminated). Contrary to the beliefs of many proponents of earnings guidance, we do not find a significant increase in overall volatility, nor do we find a decrease in analyst following after the firm stops providing guidance. We do, however, document a greater increase in analyst forecast dispersion and a greater decrease in forecast accuracy following the decision to stop guiding for our event firms relative to our control firms. Second, our study provides further insight into the motivation behind the recent upsurge of firms discontinuing earnings guidance. Although many of these firms argue that guidance forces a short-term orientation and impedes long-term value creation, our results suggest that poor prior performance and lack of demand for guidance are the primary drivers behind the decision to give up guidance. In particular, we are unable to document a positive association between the decision to renounce guidance and the level of ownership by investors with longer horizons and greater activism (public pension funds and block holder ownership). Moreover, if guidance is truly a value-decreasing proposition on account of the short-term focus imposed on managers, giving up guidance ought to be associated with positive announcement period returns. However, we find an economically and statistically negative stock market reaction around the guidance stoppage announcement."
Jamie Dimon, who - surprise, surprise - also happens to be the chair of Business Roundtable, is leading the charge for less transparency into earnings, as I've been saying for years now, most recently in 2016.
My position was a rebuttal to the the Roundtable's 2016 nine-page paper, "Commonsense Corporate Governance Principles," and a warning.
I cautioned that, to permit large and "Too Big to Fail" banks like JPMorgan Chase to skip quarterly reporting would be dangerous, given how important these banks are to the economy.
The fact is, economic conditions and short-term market fluctuations impact banks' equities, fixed-income investments, currencies and commodities, and investment banking revenue, not because they have to produce quarterly earnings, of course, but because that's what affects their earnings on an almost daily basis.
Reporting earnings twice a year, for any public company, when conditions can change radically from month to month, is risky for the global economy, bad for transparency, and bad for investors like you and me, and it always will be.
Don't believe any CEO that tells you otherwise.
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