New guide lays out ‘long-termism’ replacement for corporate quarterly earnings guidance

Proposal comes as fund managers increasingly tell companies to drop the 3-monthly numbers.

A new guide to help companies move away from quarterly reporting and instead provide investors with long-term strategic information has been launched by KKS Advisors and the Generation Foundation, the advocacy group of Generation Investment Management, headed up by former US Vice-President Al Gore and David Blood. UK fund managers including Legal and General Investment Management and Schroders recently wrote to FTSE-350 Chairs urging them to abandon quarterly reporting and instead focus on long-term strategic issues. That followed last year’s dropping by the UK Financial Conduct Authority of a rule mandating financial reports every three months.
The guide, called “Implementing Integrated Guidance: Case Studies in Communicating Value Relevant Information”, says quarterly earnings guidance is now clearly associated with short-termism – a practice widely viewed as a fundamental problem in global capital markets. As a result, it says household brand companies such as Coca-Cola, Google and Unilever have moved away from the practice, but that a recognised replacement has yet to evolve. The guide makes the case for adopting a so-called ‘Integrated Guidance framework’ in its place.
Significant, long-term strategic drivers relevant for investment decisions are identified in the report, including ESG factors. It outlines a six-step process for CEOs to follow to end regular earnings guidance and move to reporting long-term issues.Speaking to Responsible Investor, George Serafeim, a Harvard Business School Professor and Senior Partner at KKS Advisors, said a new process was critical for companies because top investment analysts are interested in long-term and ESG information but they say the information is not communicated effectively and they don’t know how to assess it: “It’s the chicken and egg problem,” said Serafeim. “It’s surprising to find that CEOs and companies are not leading on this. I consistently find in discussions around long-term strategic issues that it is important for analysts. It’s a very competitive space and they can get an advantage with this.”
The guide follows on from a Generation white paper in 2012 entitled Sustainable Capitalism that assessed what was hindering sustainable capital markets and identified quarterly earnings guidance as a driver. Shalini Rao, an associate with Generation Foundation, said it was important for companies to move to standardised reporting measures around so-called extra-financial information. Asset owners and fund managers, she said, need to ask for the same information in order to reciprocate.
David Blood, Senior Partner at Generation Investment Management, said: “Our 2014 paper with KKS showed that the costs of regular earnings guidance significantly outweigh the perceived benefits. This new paper builds on those findings and furthers the case for a more comprehensive form of reporting, one which includes sustainability factors and fosters long-term value creation.”

Link to Implementing Integrated Guidance: Case Studies in Communicating Value Relevant Information