Dimon, Buffett: Stop quarterly forecasts
Focus on profit guidance ‘unhealthy,’ they say
JP Morgan Chase CEO Jamie Dimon and billionaire investor Warren Buffett are calling on CEOs to move away from issuing quarterly profit “guidance” to Wall Street analysts, arguing that the financial markets’ focus on short-term results harms the economy.
Many CEOs who take part in the common practice of providing Wall Street estimates of how much money their companies will make often feel “pressure” to meet those quarterly forecasts. As a result, corporations “frequently hold back on technology spending, hiring, and research and development” that would improve businesses’ future growth, Buffett and Dimon say.
The guidance “often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability,” the two powerful CEOs wrote in a commentary piece in The Wall Street Journal. “We are encouraging all public companies to consider moving away from providing quarterly earnings-per-share guidance.”
Dimon, is chairman of the Business Roundtable, an association of nearly 200 CEOs that is also backing the push to eliminate so-called short-termism.
Quarterly earnings guidance works like this: Heading into the profit reporting season, a CEO gives forecasts of sales and profits to the Wall Street ana- lyst community. The analysts take the company guidance into consideration when making investment recommendations and setting price targets for stocks. When the actual earnings results are officially reported, so-called beats — or profit results that top expectations — are often rewarded with a rise in the stock price. In contrast, results that fall shy of market forecasts often cause the stock price to fall.
Proponents of the practice say it im- proves communications with investors and ultimately results in fewer, not more, wild swings in stock prices.
But Buffett says the practice of CEOs providing a heads-up on how earning-sper-share results are shaping up often causes them to make poor decisions to ensure that the company beats or meets the results they’ve communicated to Wall Street.
“When companies get where they’re sort of living by so-called making the numbers, they do a lot of things that really are counter to the long-term interests of the business,” Buffett told CNBC on Thursday.
Buffett and Dimon also blamed the practice for contributing to the decline in the number of public companies in the U.S. over the past 20 years.
“Short-term-oriented capital markets have discouraged companies with a longer view from going public at all, depriving the economy of innovation and opportunity,” Buffett and Dimon wrote.
The top executives, however, admitted that eliminating guidance won’t alone eliminate all short-term performance pressures. “But it would be a step in the right direction,” they wrote.