Monday, February 9, 2009
In the world of running a public company one of the critical skills a CEO/CFO team used to have to have was the ability to set guidance for the "Street" - that is the sell side analysts who cover their stock and publish research and guidance to investors.
Guidance was typically top line and bottom line, revenue and earnings and the street would come up with a consensus on what EPS (earnings per share) the company would earn in the following quarters - often based on complex models developed in the wee small hours of the night by hard working young analysts.
Setting, and then making guidance worked well for high quality companies - they earned investor trust and were rewarded in the stock price - and the process could also create controversy when, for example Google said it would not provide guidance because the founders did not want to ever sacrifice the long term for a short term reporting need. If you're Google you could get away with that, but only the rarefied few could, and in the past most would have been crushed by such arrogance.
So what happens now? As reported by MarketWatch, an increasing number of companies like GE and AMD are stopping guidance in the current downturn because they have simply lost good enough visibility to be able to provide it with integrity.
It's an ethical and practical dilemma. If the CEO doesn't provide guidance he's not supporting his investors - one of his key constituencies - and their need to understand the company's expected performance in order to value to stock. If he does provide guidance and he really doesn't have enough visibility then he could be misleading his investors (and setting himself up for shareholder lawsuits).
I'm a big believer in transparency and over time that companies will be rewarded for it. Many institutional investors are investing for the long term - more so now than in the recent past - and want and need companies to share the metrics that drive their businesses in order to build their models and understanding. Transparency may not be EPS guidance, but it should be the best information the company can provide to share the outlook management sees. Companies withholding information or being coy about it infuriates investors, as well it should (and even worse is when they miss lead investors by manipulating revenue, as does still happen).
It takes courage for CEOs and CFOs to be transparent and help their shareholders really understand what's happening to their businesses, but I believe that in the long term - and following the downturn - the CEOs that figure out how to stay transparent will be rewarded.