NIRI and CFA Institute Centre Release Results of Joint Study on Public Company Guidance Practices and Preferences

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Source: National Investor Relations Institute (NIRI) and CFA Institute

Vienna, VA, and New York – The National Investor Relations Institute (NIRI) and CFA Institute have announced the results of a recent simultaneous member survey conducted to gain insight into the practices and preferences of public companies and investment professionals on the subject of public company financial and non-financial guidance.  

NIRI surveyed its public company members for information about three types of guidance:  earnings guidance (“earnings per share,” or “EPS”); broader financial guidance (not including earnings per share guidance); and non-financial guidance, or any information about current market or business conditions that may impact company performance and is not typically reflected in corporate financial statements. (View the NIRI survey.)

The CFA Institute Centre surveyed CFA Institute members in the United States on the issues of earnings and other guidance, preferences toward corporate communications practices and incentives.  These three issues figured prominently in a 2006 CFA Institute Centre white paper co-written with the Business Roundtable Institute for Corporate Ethics, Breaking the Short-term Cycle, which cited a focus on quarterly earnings guidance, poor communications and transparency and current incentive structures as three forces driving short-term thinking in the markets.  Intended survey respondents included CFA Institute members currently analyzing, following, and/or investing in companies with job functions or responsibilities including buy-side analysts, investment banking analysts/investment bankers, manager of managers, portfolio managers, research analysts, and sell-side analysts.  (View the CFA Institute Centre survey.)
 

Guidance Practices, Preference and its Implications

• Among NIRI members who do not provide quarterly earnings guidance, nearly three quarters (74 percent) refrain from doing so to focus on long-term company performance.  Among CFA Institute members who think that providing earnings guidance is not a best practice, the main reason for their disagreement is the belief that companies should focus on their long-term performance (91 percent).
• Sixty-four percent of NIRI members report providing earnings guidance compared to 51 percent in 2007 survey results and 66 percent in 2006, representing the reversal of a trend toward fewer companies providing earnings guidance that had developed over the last several years.
• Seventy percent of NIRI members provide broader financial guidance (not including earnings guidance), consistent with 71 percent in 2007 survey results.  Fifty-seven percent of NIRI members provide non-financial guidance.
• CFA Institute members surveyed approve of the use of yearly earnings guidance more than the use of quarterly earnings guidance. When asked whether it is a best practice for companies to provide quarterly earnings guidance, survey participants responded that they agreed or strongly agreed at a rate of 45 percent. When the same question was asked concerning yearly earnings guidance, 60 percent agreed or strongly agreed.
• CFA Institute members who use financial guidance (excluding earnings guidance) preferred annual estimates of such guidance more than quarterly financial guidance or other options.  When asked how they preferred such financial guidance, 46 percent preferred annual estimates, 25 percent preferred quarterly estimates, and 24 percent preferred long-term estimates (greater than one year).
• CFA Institute members surveyed approved of the use of yearly non-financial guidance on a long-term basis (more than one year) or on an as-needed basis more than yearly or quarterly non-financial guidance.  When asked about best guidance practices, 71 percent of those surveyed responded that they agreed or strongly agreed that companies should provide non-financial guidance on a long-term (greater than one year) or as-needed basis.  Sixty-five percent agreed or strongly agreed that such guidance was best given on an annual basis, while 51 percent agreed or strongly agreed that such guidance was best given quarterly. 

Communication

• About 54 percent of investment professionals indicate that over half of the firms they follow adequately communicate their long-term strategic objectives.  Conversely, approximately 47 percent state that less than half of the firms they cover adequately communicate their long-term objectives.
• CFA Institute members strongly prefer companies to simultaneously provide guidance on a broad number of financial measurements, with revenue and capital expenditures as the top two (86 percent and 84 percent, respectively).  Trend information that may impact a company’s business and industry-specific information were the top two non-financial measurements preferred by investment professionals.
• The primary reason NIRI members indicated for providing all types of guidance is to ensure sell-side consensus and market expectations are reasonable, which is consistent with prior survey results. In addition to earnings guidance, respondents provided financial guidance on revenue, capital expenditures and tax rate guidance most frequently. Non-financial guidance is most commonly provided in the form of qualitative statements about market conditions, trend information and industry-specific information.

Incentives

The CFA Institute Centre asked investment professionals about their compensation and incentive structures.  The white paper Breaking the Short-term Cycle identified the existence of short-term incentive structures as a driver of short-termism and recommended, in part, that analyst and asset manager compensation be better aligned with long-term performance and client interests.  

• The CFA Institute survey reported that incentive structures of analysts and asset managers are currently geared to yearly performance, with incentives for periods of greater than one year more common than short-term incentives. However, sell-side professionals are more likely to have quarterly incentives in their pay packages than their buy-side counterparts.

“Public companies generally provide a wealth of information to assist investors in better understanding their operations, of which guidance is just one piece,” said Jeffrey D. Morgan, president and chief executive officer of NIRI.  “These results reveal that there is a demand for various types of guidance, and that NIRI members are meeting that demand in the way best suited to their unique circumstances.  The survey results also support the concept that there is no ‘one size fits all’ form of disclosure, and that each company needs to consider its internal forecasting abilities, the needs of the financial community, all other constituencies and industry practice, all in the context of stock exchange and federal and state disclosure rules and regulations, when formulating an effective disclosure policy.”

"The CFA Institute Centre is particularly pleased that members continue to support a longer-term focus by company managements.  The recommendations reached in our joint report with the Business Roundtable Institute remain relevant and are important, in particular, having companies move away from  the practice of providing quarterly earnings guidance, while providing more detailed information about a broader range of long-term information," noted Jeff Diermeier, CFA, president and CEO of CFA Institute.

These surveys are part of the ongoing analysis and dialogue on short-termism and earnings guidance from CFA Institute and NIRI.  The surveys will be presented at NIRI’s annual conference later this month.
 

Additional Resources

• 2007 NIRI Earnings Guidance Practices Survey
• 2006 NIRI Earnings Guidance Practices Survey
• Breaking the Short-Term Cycle
• Apples-to-Apples: A Template for Reporting Quarterly Earnings
• CFA Institute Centre research topics and positions

About the Study

After jointly constructing questionnaires, NIRI and the CFA Institute Centre conducted simultaneous member surveys in March 2008 to gather insight into the trends, practices and opinions of NIRI corporate members regarding public company guidance, and CFA Institute member investment professionals on the issues of earnings and other guidance, communications and incentives.  The NIRI electronic survey was sent to 3,119 NIRI corporate members, and garnered a response rate of approximately 12 percent.  The CFA Institute electronic survey was sent to 16,000 CFA Institute members in the U.S., and received a response rate of seven percent.

About NIRI 
NIRI is the professional association of corporate officers and investor relations consultants responsible for communications among corporate management, shareholders, securities analysts and other financial publics. NIRI’s 4,400 members represent nearly 2,100 publicly held companies and $5.4 trillion in stock market capitalization.  For more information, please visit www.niri.org.

About the CFA Institute Centre for Financial Market Integrity

The CFA Institute Centre develops timely, practical solutions to global capital market issues. Established in 2004, the CFA Institute Centre builds upon the CFA Institute mission to lead the investment profession globally by setting the highest standards of ethics, education and professional excellence. It carries forward the organization’s 60-year history of standards and advocacy work, especially its Code of Ethics and Standards of Professional Conduct for the investment profession. More information may be found at www.cfainstitute.org/centre.

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