Jamie Dimon and Warren Buffett have again made a pitch to eliminate “short-termism” by calling on CEOs to stop providing quarterly guidance.
But is earnings guidance really the issue? I don’t think so.
To begin with, only about one in five companies still provides quarterly guidance.
Second, eliminating earnings guidance or commentary would do nothing to eliminate short-termism. Here’s why: the 1934 SEC Act (which created the SEC) mandates that companies provide quarterly earnings reports. It’s those reports that are used by analysts to generate commentary and guidance.
Importantly, neither Dimon nor Buffett called for eliminating quarterly earnings reports, though plenty of other people have. “I wish it would all go away,” Bob Lutz, a former executive at Ford, General Motors, and Chrysler, told us this morning. He was referring to earnings guidance, analyst reports, and quarterly reports — the whole thing. Just go away.
Let’s think about this. Who would win when there is much less information available to the public? If you notably reduce public information, I would bet that the quality of analyst commentary would likely deteriorate. I also think there will be an even greater information asymmetry: Professional investors who have access to greater information will have an even greater advantage over the average investor.
And reducing information will not eliminate analysts trying to figure out what companies’ earnings will be, whether it’s quarterly, or every six months or once a year.
If companies don’t set goals, Wall Street will.
The bigger issue is the mindset of CEOs. They have short-term thinking because they are, well, short-termers. The time frame for CEOs remaining at firms is down to about five years, according to Jeff Sonnenfeld at Yale School of Management.
That is the cause of much of this aberrant behavior, Scott Galloway from Stern School of Business noted on CNBC. “When you pay CEOs based on earnings, and the metric is quarterly earnings, and the compensation committee says 98% of your compensation is going to be based on the stock price, which investors have linked to the earnings, compensation drives behavior.”
Look, I understand the goal. By reducing the amount of information, the hope is to reduce volatility in the company’s stock and allow CEOs to concentrate on long-term planning. But it’s not clear that providing less information will reduce volatility in a stock.
Finally, what’s wrong with short-termism? I have endless admiration for Warren Buffett, but arguing that people should hold stocks for their entire lives — as he did this morning — is just not realistic.
There is a small but significant group of people who trade stocks frequently, certainly more than once a quarter. You can argue that they will likely underperform long-term holders, and that’s fine. But to argue that we should all just buy Coca-Cola and hold it into our 90s is not going to fly with a very large subset of shareholders.