‘Short-termism’ cry a red herring

Great quarter, guys,” exclaim analysts, one by one, on many company earnings calls. Why the surprise? Usually on the earnings call three months earlier, the chief financial officer will have told them what the revenue and profits would be (often sandbagged so the company can beat modest expectations). So-called earnings guidance has become standard practice for some companies hoping to massage investor expectations.

On Thursday the Business Roundtable, a corporate lobbying group chaired by JPMorgan boss Jamie Dimon, said they should end the practice in the cause of curbing dreaded “short-termism”. It is a rousing, rallying cry, which investor Warren Buffett backed in an interview with CNBC. It is also a red herring.

Companies listed in the US are required to report earnings four times a year. That rule comes from reforms following the market crash of 1929. Before that, companies had little obligation to share even basic information about their operations.

The Business Roundtable does not want to abolish quarterlies altogether, just quarterly guidance. But most companies are already ahead of them: only about a quarter of the S&P 500 gave forecasts in 2016, according to research from FCLT Global, a corporate advocacy group.

Even without guidance, buy and sell side research analysts can construct their own financial models from quarterly numbers, company commentary and whatever proprietary digging they indulge in. All that adds to a “consensus” expectation irrespective of whether the chief financial officer nudges the maths one way or another.

The biggest hole in the short-termism argument is that correlation does not equal causation. A company could simply state that it will have two poor quarters, to have better profits in the following year. It is up to investors to decide whether that trade-off is credible or worthwhile. The long term is simply the sum of a bunch of short terms. London, June 8