The U.S. economy falls into a recession, a global financial crisis ensues, triggering a slowdown in global growth, then an outright global recession. Almost on cue, companies begin to scrap guidance -- or their quarterly and full-year outlook for revenue, earnings and other metrics -- and the debate on the merits of guidance begins.
Is guidance superfluous, an unneeded metric on an already overloaded financial landscape? Or is the elimination of guidance another step into opaqueness and a lack of transparency -- just an extension of the clouded climate that's in part responsible for the financial crisis in the first place?
Economist Peter Dawson is against quarterly guidance, but supports full-year guidance. Quarterly guidance, Dawson argues, "has encouraged a short-term mentality in corporate operations" -- one that's not conducive to longer-term planning, and ultimately, sustainable growth.
"Quarterly guidance, and the quarterly reporting system it supports, tells executives to think short-term, that only short-term metrics count. We've seen what this has led to . . . a lot of quick-hit operations, short-term tactics that don't benefit a company long-term, and even gimmickry, to get the quarterly numbers higher, to the detriment of long-term value," Dawson said. "We can't eliminate quarterly reporting, but the end of quarterly guidance would be a step away from short-term thinking and toward long-term planning, and that would be a positive step, in my view."
Ideally, Dawson said, the United States should move toward the European model of semi-annual, to encourage long-term planning that places a premium on an division's or project's value to a company over years. But he recognizes that reporting system is not likely to appear in the U.S. anytime soon.
Guidance ingrained in the system?
Economist David H. Wang disagrees, arguing that guidance is both a key metric, and like it or not, it's ingrained in the U.S. financial system.
"Some ratings agencies may disagree, but in my view a company's discontinuance of quarterly guidance is management's statement that they lack confidence in their operation, in their outlook in the quarters ahead," Wang said. "And the fact that companies are eliminating guidance during a recession, when times are bad, is all the more telling. If they view guidance as so destructive or unnecessary, why didn't they eliminate it during the economic boom?"
Guidance, Wang argued, "often tells investors and traders more about a company's operations than the quarterly and yearly results they report."
"Frequently, guidance has more impact on investors and traders than the quarterly report," Wang said. "If Company XYZ meets the consensus quarterly earnings estimate of 25 cents per share, but it lowers its earnings guidance for the next quarter to 10 cents from earlier guidance of 20 cents per share, the company is saying they expect a slowdown ahead, and investors should be warned about that possibility."
Further, thousands of trading decisions, institutional and otherwise, are driven by quarterly guidance, Wang said. "The American economic system is much more granular than Europe's, and like it or not, this is viewed as being a more efficient system," he said. "The U.S. could eliminate both quarterly guidance and then quarterly reporting, and move to a half-year system, but that would imply changes that would go against the business culture, so I don't see that occurring any time soon."
Summary: To be sure, when one adds bank, boutique, think tank, and association data, there's no shortage of metrics and data analysis in the American financial and economic systems. That said, quarterly guidance is a key, future-oriented estimate: guidance says a lot about where companies think their operations are headed.
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