Should Short-Term Earnings per Share Guidance Go Away?
In an op-ed article published late Wednesday by The Wall Street Journal, Warren Buffett, chairman of Berkshire Hathaway Inc. (NYSE: BRK-A), and Jamie Dimon, chairman and CEO of JPMorgan Chase & Co. (NYSE: JPM), argued that now is the time for publicly traded U.S. companies to stop providing quarterly earnings per share (EPS) guidance.
On Thursday morning, the Business Roundtable which includes CEOs of U.S. companies with more than 16 million employees and more than $7 trillion in annual revenues, weighed in supporting the proposal. That’s not too surprising given the Dimon is currently the chair of the Business Roundtable.
In their op-ed piece, Buffett and Dimon argue that “effective long-term strategy drives economic growth and job creation” and that quarterly EPS guidance “often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability.”
Business Roundtable CEO Joshua Bolton seconds that opinion:
The health of U.S. financial markets and our economy depends on well-informed, long-term investments by businesses and shareholders alike. An outsized emphasis on quarterly earnings per share projections undermines the importance of investments in infrastructure, workforce development and other crucial capital expenditures that drive sustained U.S. economic growth.
Buffett and Dimon started down this path in 2016 with a document called Commonsense Corporate Governance Principles that included recommendations for “truly” independent corporate boards of directors and “constructive engagement” between corporate management and shareholders, as well as eliminating quarterly EPS guidance.
Neither Buffett and Dimon nor the Business Roundtable is arguing against quarterly or annual reports from public companies. That reporting should continue and offer a look at past performance and assess how that performance is working toward realizing a company’s long-term goals and strategy.
Although we’ve seen no immediate opposition to the proposed elimination of quarterly EPS guidance, it’s not difficult 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. That tilts the playing field and invites of all sorts of shenanigans with favored investors. This harks back to the pre-Regulation FD (full disclosure) era before the SEC issued the rule in August 2000.
A less compelling argument is that corporate EPS guidance more or less anchors analysts’ EPS estimates. Without company guidance, analysts’ estimates are likely to vary more, making share prices more volatile at the same time that estimates become less valuable to investors and, horror, not worth paying for.