The Business Roundtable is advocating for public companies to move away from having to provide quarterly earnings per share guidance.
The group said that public companies should be managed for long-term prosperity, not to meet the latest forecast. Providing guidance about quarterly earnings performance can lead to an undue focus on short-term profits, at the expense of long-term strategic investments. Ultimately, this can have a negative impact on companies, their shareholders, and financial markets.
They added that quarterly results often reflect factors beyond a company’s control, such as political events and even weather.
“The health of U.S. financial markets and our economy depends on well-informed, long-term investments by businesses and shareholders alike,” Business Roundtable President and CEO Joshua Bolten said. “An outsized emphasis on quarterly earnings per share projections undermines the importance of investments in infrastructure, workforce development and other crucial capital expenditures that drive sustained U.S. economic growth.”
The Business Roundtable says investors need critical information on the long-term health and strategy of companies.
“I’ve seen how pressure to produce forecasted results distort business decisions in a myriad of ways,” Berkshire Hathaway Chairman and CEO Warren Buffett said. “Companies, shareholders and, indeed, our country would be better served by focusing on concrete metrics and fundamentals rather than pre-emptive commitments to short-term performance.”
Further, eliminating quarterly earnings guidance would not lead to less transparency or render management less accountable.
“America’s current and future retirees deserve to know that their savings are being invested based on reliable metrics and accurate reporting,” Council of Institutional Investors Executive Director Ken Bertsch said. “When companies are managed for the long term, it creates value for shareholders with long investment horizons. Practices that encourage long-term thinking and investment create value for millions of Americans without sacrificing the transparency and accountability that investors deserve.”
Companies should clearly communicate their strategic goals on a timeline deemed appropriate for the needs of each specific company and its investors. Further, companies would still provide quarterly reporting, but it would be done to show performance and progress toward strategic goals. They should avoid making short-term decisions that are inconsistent with their long-term strategies to simply beat short-term performance benchmarks.