Wednesday, June 27, 2007

Call to drop quarterly earnings forecasts

Call to drop quarterly earnings forecasts
By Francesco Guerrera in New York
Copyright The Financial Times Limited 2007
Published: June 26 2007 22:03 | Last updated: June 26 2007 22:03

US companies will on Wednesday come under renewed pressure to scrap quarterly earnings guidance from a high-profile coalition of business people led by a former regulator.

The group, chaired by William Donaldson, former Securities and Exchange Commission chairman, will warn that excessive focus on short-term results damages the country’s economy and plays into the hands of hedge funds and private equity groups.

“Quarterly guidance is at best a waste of resources and, more likely, a self-fulfilling exercise that attracts short-term traders,” says the report by the group, which was brought together by the Committee for Economic Development, a Washington think-tank.

“The pressure associated with quarterly earnings guidance has been cited as one of the factors fuelling the boom in private equity buy-outs,” adds the report by the CED, whose members include influential figures such as Pete Peterson, co-founder of the private equity group Blackstone and William McDonough, former head of the New York Federal Reserve.

More than half of US listed companies provide their own forecasts of quarterly results – a practice that is illegal in most other countries.

Guidance tends to be liked by hedge funds, who trade on the small discrepancies between reported and forecast earnings, and some analysts, who run a smaller risk of making mistakes when companies feed them this information.

The call by the Donaldson group – whose members include representatives from oil groups Shell and Chevron, Wall Street banks Goldman Sachs and Morgan Stanley, and drugmaker Pfizer – highlights growing concerns over corporate America’s attention to short-term goals.

A week ago, another coalition, masterminded by the Aspen Institute, issued a similar warning, saying US economic competitiveness was being harmed by companies’ near-term focus.

That warning, first reported in the FT, echoed the concerns expressed by other groups of academics and business people, including one backed by Hank Paulson, Treasury secretary, in the past few months.

However, unlike other coalitions, the Donaldson group calls on directors, rather than executives or regulators, to change the short-termist culture.


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