GUEST COLUMN - Yvette Lokker

The debate on whether Canadian issuers should or should not provide guidance is not a new one. I remember planning a session on guidance for the 2009 Annual Conference, my first one with CIRI. During this session, the IROs from TELUS and Starbucks discussed their approaches to guidance (one provided guidance while the other did not) and the pros and cons of doing so. This debate is still alive and well within the IR community.

What has changed over time is that broader capital market participants are much more engaged in this discussion. In fact, guidance practices are getting more attention from key IR stakeholders, including analysts and institutional investors, who are appealing to executives and directors of publicly listed companies to change their practices around earnings guidance.

The CFA Institute issued a publication titled Breaking the Short-Term Cycle, encouraging issuers to stop providing quarterly earnings guidance. They indicate that the “obsession with short-term results by investors, asset management firms, and corporate management collectively leads to the unintended consequences of destroying long-term value, decreasing market efficiency, reducing investment returns, and impeding efforts to strengthen corporate governance.” [1]

The pressure on issuers to deliver short-term results was also addressed in a survey conducted by McKinsey & Company in 2006. Business executives from across the world identified the three most significant benefits of earnings guidance as (1) satisfying requests from investors and analysts, (2) maintaining a channel of communication with investors, and (3) intensifying management’s focus on achieving financial targets. This survey further indicated that the most demanding groups calling for earnings guidance are sell-side analysts, mutual/pension funds, and internal sources.[2] Yet the CFA Institute found in a survey of its membership (comprised largely of analysts and asset managers) that 76% of respondents supported companies moving away from quarterly earnings guidance. And 96% of those indicated that issuers should provide additional information on the fundamental, long-term drivers of the business.[3]

The emphasis on short-term results not only continues, it has intensified. In early 2013, McKinsey & Company conducted a survey of more than 1,000 Board members and C-suite executives around the world. The survey found that 63% of respondents said the pressure to generate strong short-term results had increased over the previous five years. Executive respondents indicated that the stakeholder exerting the greatest amount of pressure to deliver strong short-term financial results was their Boards, at 46%. The Board respondents indicated that they are channelling increased short-term pressure from investors, including institutional investors.[4]

As a result, McKinsey & Company partnered with the Canadian Pension Board to launched a joint initiative, Focusing Capital on the Long Term. This initiative calls on institutional investors and corporate directors to focus their thinking and actions on long-term value creation.

It seems clear that there are a number of factors contributing to the short-term environment in which we operate, including compensation of the various stakeholders. Analysts and portfolio managers are compensated on short-term variables such as quarterly earnings and fund performance. The CFA Institute, recognizing the issue of incentives and compensation, has appealed to institutional investors to align asset manager compensation with long-term performance and long-term client interests.[5]

Given this active discussion, CIRI wanted to better understand Canadian practices around guidance. At the end of 2014, we launched IR directions, surveys to establish benchmarks and identify trends, with a look at guidance practices[6]. Specifically, we were interested ln learning: how many Canadian issuers are providing guidance, as well as the type, time horizon and frequency of their guidance; how guidance is communicated; and whether changes in guidance practices might be on the horizon.

Based on this survey, we found that 87% of respondents provide some type of guidance, financial or non-financial. While non-financial guidance was more common at 74%, financial guidance is still being provided by 67% of respondents. Guidance, whether financial or non-financial, is most commonly provided annually, although one-quarter of respondents do provide quarterly guidance.

Among respondents providing financial guidance, 61% provide earnings guidance. Over one-third of those provide their guidance in the form of a range. Respondents providing earnings guidance include 74% who are doing so annually, while 47% are doing so quarterly. Interestingly, 47% provide earnings guidance for the longer term. More than one-third (37%) of respondents provide both quarterly and annual earnings guidance.

When we look at the reasons for providing guidance, we see some interesting results. The most commonly cited reason for providing guidance is to help establish reasonable market expectations (83%) and to improve transparency (77%). Management philosophy was cited by 47%, while Board philosophy was mentioned by a mere 10%. This seems contradictory to the findings of the McKinsey & Company research, where executives felt the most pressure from their Boards to deliver in the short-term. We would have expected that Board philosophy ranked higher; however, perhaps this is a function of the different stakeholder groups completing the survey.

While the majority of respondents (81%) do not foresee any changes in their guidance practices, it will be interesting to see how practices evolve, particularly in light of the increased attention from various stakeholders.

To see the full IR Directions: Guidance Practices report, click here. (You will be required to login).

In order to facilitate discussion of this topic among IROs in Canada, CIRI is hosting a session at this year’s Annual Conference. We will hear from Matt Orsagh from the CFA Institute, as well as IROs who do and do not provide guidance. It should be an interesting debate. I hope you will be there to join the discussion.