Warren Buffett Archives

Complaints abound that CEOs of publicly traded enterprises are too obsessed with beating Wall Street's expectations of quarterly earnings. By and large, chief executives, and the boards to which they report, are incented inimically, and pressured by financial analysts, to focus on the short term -- and they don't disappoint. Sadly, this quarterly fixation wreaks chaos across the enterprise: it impairs judgment, inspires lying and cheating, and sinks the brand (if it exists). Alex Berenson's bestseller, The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America, details how Enron, Tyco, WorldCom, and other once-high-flying corporations self-destructed from abiding said pressure. It's common for companies to sell as many products as possible, sometimes illegally, in the last week of the quarter, to spike revenues and stock prices. Some, like ArthroCare, have been caught "channel-stuffing": overloading distributors with unwanted inventory, counting those bogus shipments as revenues. Heaven's Gate Said Paul Polman, CEO of Unilever: “Too many CEOs play the quarterly game and manage their businesses accordingly. But many of the world’s challenges cannot be addressed with a quarterly mindset.” While I agree with Mr. Polman's lament about succumbing to the quarterly game, I reject his thesis that corporations are charged with "addressing the world's challenges." Newsflash: Corporations exist and compete to make customers' personal and professional lives better, enriching the owners in the process, not to save the world. The secondary benefit of successfully and consistently following this formula is advancing all civilization. Unilever's Polman is not alone. Many executives and academics claim to dislike the universal mission of corporations: maximizing shareholder wealth. For example, Marc Benioff, CEO of Salesforce, also avers that "the business of business is improving the state of the world." I'll repeat what I asserted recently about Mark Zuckerberg: Such do-gooder virtue-signaling is a plutocrat's disingenuous attempt to express wealth-guilt -- after building that wealth -- and to mollify the torches-and-pitchforks mobocracy. It's not a strategy for success. Recall what Michael Bloomberg told Steve Croft of 60 Minutes about his Utopian moves as New York City's mayor (like trying to restrict soft-drink purchases): “I like what I see when I look in the mirror. We’ve probably saved millions of lives, and certainly we’ll save tens of millions of lives going forward. There aren’t many people that have done that. So, you know, when I get to heaven, I’m not sure I’m going to stand for an interview. I’m going right in.” Foolishly playing the quarterly game is as counterproductive as angling to enter Heaven's Gate: neither approach serves shareholders well. Cease Giving Guidance What leads directly to quarterly chaos is the custom of giving earnings guidance: predicting in one quarter the revenues and earnings of a future quarter. Corporations are not required to provide such guidance to Wall Street, and they must cease the practice. Why do companies give guidance, even though it hurts them? Companies have believed, falsely, that giving guidance enhances investor relations, reduces share-price volatility, and increases valuations. McKinsey & Company, the management-consulting firm, reported in 2006 that there is no correlation between quarterly guidance and valuation. Moreover, belief in such correlation is misguided. In fact, an increasing number of companies merely report quarterly earnings, as the SEC requires, without guidance. During an earnings call, analysts want to hear the firm's long-term strategy for growth and profitability. Here's when the CEO can explain the brand, which sets the company's purpose and direction, paves its product path, and is, therefore, its ultimate bottom line. Parting Advice to CEOs The corporation's mandate is to maximize shareholder wealth -- not in one week or one month or one quarter -- but on a sustainable basis. This can't be accomplished with myopia, shortcuts, greed, and fraud -- all of which will boomerang to minimize shareholder wealth. Only by treating customers, employees, and all stakeholders well, focusing on the long term, properly setting Wall Street's expectations, and steadily delivering value can CEOs maximize the wealth of shareholders. Memo to boards of directors: That is how to end quarterly chaos. POSTSCRIPT #1: Warren Buffett & Jamie Dimon Campaign Against Quarterly Guidance POSTSCRIPT #2: President Trump Urges SEC to Institute Six-Month Reporting POSTSCRIPT #3: Tech CEOs Are Purposely Low-Balling Guidance (02/08/20) © 2017 Marc H. Rudov. All Rights Reserved.About the Author Marc Rudov is a branding advisor to CEOs,producer of MarcRudovTV, and author of four books

How CEOs Can End Quarterly Chaos

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