NIRI updates earnings guidance policy to focus on long term

NIRI has announced an updated policy statement on earnings guidance that prioritizes a longer-term view of company performance.

The new policy discourages NIRI members from offering quarterly guidance estimates, suggesting that it drives short-termism. Instead, companies should consider offering annual guidance that’s updated quarterly, the policy says.  

Almost one third (29 percent) of NIRI members provide quarterly EPS estimates, according to NIRI’s earning process practices research report in 2016. Significantly more respondents, 67 percent, provide annual guidance.

Watch: NIRI president and CEO Gary LaBranche and NIRI chair-elect Ron Parham discuss the updated policy statement on quarterly guidance

The updated policy statement encourages NIRI members to provide a range of outcomes for each time frame and metric, rather than offering a single point or unreasonably narrow range ‘to help investors and analysts better understand the inherent variability of its business’. It was approved by NIRI’s national board on July 9 and is an update of a 2008 policy statement that covered earnings guidance.

The new policy statement doesn’t altogether do away with the practice of quarterly guidance, noting that it may be appropriate for a company to provide a more short-term estimate to address seasonality or market volatility, or to be consistent with competitors.  

‘As I’ve gone around and visited with NIRI chapters over the last year, I often ask about quarterly guidance – it’s one of the five or six trends I ask about,’ Gary LaBranche, NIRI president and CEO, tells Corporate Secretary sister publication IR Magazine. ‘I almost always take a poll of these groups and very few will offer quarterly guidance… over the years fewer and fewer NIRI members have been issuing quarterly guidance. More often its annual guidance updated quarterly.’

Quarterly guidance has recently been the subject of public discussion, with Warren Buffet and Jamie Dimon writing a column in the Wall Street Journal earlier this month on behalf of the Business Roundtable, in which they call for a reduction or elimination of quarterly guidance. Short-termism has also been cited as one reason why the number of US public companies has halved since its peak in 1996.  

A subset of the NIRI national board began seriously discussing this subject with its members, asset managers and senior corporate managements in March and developed the update in the following months.  

‘One of the things we’ve heard from the groups we’ve been speaking to on this topic is that public companies need to look very closely at which audience they primarily serve,’ says Ron Parham, founder of NW Strategic Communications and NIRI board chair-elect.

‘We’ve heard from this group that public companies have [a primary] obligation to their shareholders – their institutional investors and individual holders as owners of the company – and then secondarily (not that it’s insignificant) to the sell side. What this policy does is encourage companies… to make sure they’re crafting their guidance in a way that is most useful for their investor base.’