On the surface, quarterly earnings guidance reports offer timely and relevant insight into a company. Below the surface, however, lies the pressure to focus on short-term results at the expense of strategic planning and growth. That is the conclusion of a report from the CFA Center for Financial Market Integrity and the Business Roundtable Institute for Corporate Ethics.

“Quarterly reporting is important. But when it gets in the way of building long-term value, it can be harmful to the company and to the shareholders,” says Matthew Orsagh, co-author of the report and a senior policy analyst with the CFA Center in Charlottesville, Va. The centre sets professional standards for chartered financial analysts around the world.

According to the report, entitled Breaking the Short-Term Cycle, the “obsession” with short-term results by investors, asset-management firms and corporate managers collectively decreases market efficiency, reduces investment returns and impedes efforts to strengthen corporate governance. The shortsightedness even has its own name: “short-termism.”

“Short-termism cuts across an enterprise and results in management actions — including reductions in research and development and the forgoing of strategic investments — all in order to make the quarterly number,” says Dean Krehmeyer, the report’s other author and executive director of the roundtable institute in Virginia.

Axing the quarterly guidance report will not be easy for many companies, Orsagh says.

“It’s often easier for larger, established companies to forgo this,” he says. “But most companies can start weaning investors and analysts off them.”

How? The authors suggest that companies need to find where they are in the “earnings guidance life cycle,” a new concept unveiled in the report. This approach, which is intended to replace the current quarterly guidance model, provides direction on how often a company should report.

Orsagh’s and Krehmeyer’s report says this approach depends on the type of company and where it is in the life cycle.

An early-stage, small-capitalization company with a shorter-term product cycle, for example, will probably be covered by few analysts and may need to raise capital from the financial markets over a regular time frame. This means quarterly guidance will probably be called for.

However, as the company grows and can more easily handle fluctuations in volatility and investor sentiment, the frequency of reporting can decrease until it ultimately has “matured to the point of focusing on managing the business over the long term and has little need to provide earnings guidance to outside sources.”

The report goes on the say that asset managers, institutional investors and analysts “should use their increasing influence to support reformed corporate earnings guidance and communications practices directed at long-term performance.

“[They should] view a decrease in corporate earnings guidance as an opportunity to differentiate themselves and to add value by doing more direct research and creating superior valuation analyses and models,” the report continues.

“This is not an attempt to withhold information but to make information more relevant,” notes Orsagh.

In addition to getting rid of the quarterly guidance report, his report had four other recommendations for combating short-termism. These include an overhaul of compensation and incentive practices, leadership without blinders, communication and transparency of long-term valuation data and improved education for market participants.

The CFA and the roundtable institute are not alone in their call for planning down the road instead of around the corner.

In 2003, William Donaldson, then chairman of the U.S. Securities and Exchange Commission, urged business leaders to “manage the business for long-term results and to get away from the attitude that you’re managing the business out of a straitjacket that has been put upon you to create earnings per share on a regular basis.”

Three years prior to that, in 2000, Warren Buffett, investment guru and CEO of Berkshire Hathaway Inc. , wrote in a letter to shareholders that the time had come for management teams to look toward the future and away from quarterly earnings.

These calls will probably go largely unheeded, says Raymond Darke, a consulting certified management accountant in Markham, Ont.

Although some companies no longer issue, or have never issued, quarterly reports, investors and analysts, on the whole, are looking for information. And the more information they receive, the better — even if the news is not good. IE