Quarterly corporate reporting, particularly quarterly earnings-per-share guidance, stifles long-term investments, according to two of the leading figures on Wall Street. Warren Buffett, of Berkshire Hathaway, and JPMorgan Chase's Jamie Dimon, writing in the Wall Street Journal, said that all public companies should consider moving away from the practice, which encourages too much focus on the short-term.
Unhealthy focus on short-term profits
Dimon and Buffett also argued that corporate earnings are hard to predict and that quarterly reporting puts pressure on companies to manipulate figures and could lead to corporate misbehaviour. They wrote: “Quarterly earnings guidance often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability.”
They argue that quarterly reports, which guide quarterly earnings expectations, mean that corporate management priorities get distorted, arguing that “companies often hesitate to spend on technology, hiring, and research and development to meet quarterly earnings forecasts that can be affected by seasonal factors beyond their control”.
Companies should 'drop it right away'
Buffett and Dimon went so far as to argue that the pressure to meet short-term earnings estimates is part of the reason why there are now fewer public companies in the US than in the past two decades. They said that “short-term-oriented capital markets have discouraged companies with a longer-term view from going public at all, depriving the economy of innovation and opportunity.”
This isn't the first time the pair have voiced their opinions on corporate quarterly reporting. They also did so in a letter to other financial industry executives in 2016. And earlier this month, Dimon told CNBC that earnings forecasts “can often put a company in a position where management, from the CEO down, feels obligated to deliver earnings and therefore may do things that they wouldn’t otherwise have done. We’re hoping a bunch of companies drop it right away.”
This report from FCLTGlobal found that companies are moving away from short-term guidance, especially quarterly earnings-per-share guidance. It found that the share of S&P 500 companies issuing quarterly guidance has declined from 36 per cent in 2010 to 27.8 per cent today.
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