Buffett, Dimon say quarterly profit forecasts harming economy

09 June, 2018, 17:30 | Author: Sherman Richardson
  • Bad Advice       Quarterly guidance has resulted in bigger earnings surprises since 2016              Source Bloomberg

The pressure to meet short-term estimates has contributed to a fall in the number of United States public companies, wrote Buffett, the chairman of Berkshire Hathaway, and Dimon, who is also the chairman of top executives' lobbying group Business Roundtable, in a Wall Street Journal article on Wednesday.

"Quarterly earnings guidance often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability", they said in the op-ed.

Instead, McKinsey found, the practice of giving quarterly guidance took up valuable time from management and made them focus too much on the short term. "We are encouraging all public companies to consider moving away from providing quarterly earnings-per-share guidance".

"Reducing or even eliminating quarterly earnings guidance won't, by itself, eliminate all short-term performance pressures that USA public companies now face, but it would be a step in the right direction", Dimon and Buffett wrote.

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A less compelling argument is that corporate EPS guidance more or less anchors analysts' EPS estimates.

But Buffett says the practice of CEOs providing a heads-up on how earnings-per-share results are shaping up often causes them to make poor decisions to ensure that the company beats or meets the results they've communicated to Wall Street. The two business gurus said quarterly financial guidance encourages short-term thinking that stifles growth and limits innovation in the economy. They offered "common-sense" recommendations for public companies to improve governance and relations with shareholders.

Earnings forecasts "can often put a company in a position where management, from the CEO down, feels obligated to deliver earnings and therefore may do things that they wouldn't otherwise have done", Dimon said Thursday in an interview with CNBC.

Although we've seen no immediate opposition to the proposed elimination of quarterly EPS guidance, it's not hard to imagine what at least one argument might be: just because companies don't publish the number does not mean they won't calculate such a number.

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