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http://www.businessweek.com/articles/2013-01-02/a-wall-street-resolution-stop-giving-earnings-guidance

Management

A Wall Street Resolution: Stop Giving Earnings Guidance


A Wall Street Resolution: Stop Giving Earnings Guidance

Photograph by Getty Images

Chief executive officers and directors should make a New Year’s resolution to stop providing earnings guidance, abandoning the practice forever. If they don’t, regulators should resolve to do it for them. Regulators should repeal the safe harbor provision of the Private Securities Litigation Reform Act, which has enabled executives to provide guidance without fear of being sued.

It is possible. On Jan. 1, 2009, Paul Polman took over as CEO of Unilever (UNA), then the 60th-largest market-capitalization company in the world, valued at over $100 billion. Polman immediately told the capital markets that Unilever would no longer offer earnings guidance. Angry at his impudence, the market punished Unilever’s stock, driving it down 22 percent over the next few months (outpacing the downward push of FTSE 100, which fell by 16 percent over the period). Then the stock rebounded. By late 2012, its price was over 50 percent above Polman’s starting price (a period in which the FTSE 100 had risen about 30 percent).

Unilever, along with industry leaders such as Coca-Cola (KO), Google (GOOG), and Costco (COST), proved it can be done. Earnings guidance is not a necessary evil to be endured.

Analysts are inclined to argue that guidance is essential. Without it, they might have to rely on their own analysis to form an opinion about a stock. Imagine that.

The fact that analysts wish to continue with a free service that makes their jobs easier is not a compelling reason to continue the practice. Providing earnings guidance takes the time and attention of CEOs who would be better served paying attention to the fundamentals of their businesses. Since the dawn of earnings guidance in the mid-1990s, we have seen little upside. In fact, since its inception, the underlying volatility of the capital markets has increased substantially and we have had two absolutely blow-out stock market meltdowns—the biggest in the past 70 years. Enough is enough.

It is time for a New Year’s resolution: Terminate earnings guidance—with prejudice.

Roger Martin is Dean of the Rotman School of Management, University of Toronto, and co-author of Playing to Win: How Strategy Really Works.

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