I like companies more that don’t provide company guidance for several reasons.
Once numbers are out there, companies focus intensely on those numbers. That sounds good from a goal seeking perspective and is a standard in individual’s seeking to improve themselves. But, with companies there are many people whose feet are held to the fire and those top down goals encourage less than favorable activities – namely fudging numbers to keep out of the line of fire.
Not all accounting is black and white, there are shades of grey. This is known as management discretion. While there is nothing inherently wrong with discretion, but it can encourage wiggle room that tilts toward making the goal numbers. Now take those numbers on the bottom management levels and magnify them as they move up the management chain. Each level sways toward making the numbers, putting their own “discretion” for their level. It’s like the old fashion telephone game. By the time it reaches the top, the original message changes remarkably. No one wants to suffer the beat down for not making their numbers, so fudging occurs.
The area of estimating had been traditionally in the purview of securities analysts. Management is now “dumbing down” the analytical process to lead the analysts to the numbers management wants to show. Analyst’s love this because it provides a range for them to shoot for in their analysis. That is a hell of a lot easier than coming up with numbers from “scratch”. It also keeps the analysts from the “beat down” too. Staying with the pack (herd) is common with the analyst community, but where are the unique viewpoints that really enlighten the investors’ perspective?
Finally, it becomes more how to influence the “score board” than focusing on the “game on the field”. Make the analysts use their analytical skills and focus employee’s efforts to make the company successful on a long-term basis. Often, the fudging gets so bad, that it needs to be corrected with accounting like a big write-off or a restatement of earnings. With the correction, the view of the company by investors can shift like a tectonic plate in an earthquake. And, that can change the world.
Go back to when we were kids. Every time the telephone game is played, the story in the end if completely different from what the story really was. It was fun then, but when a stock gets hit and big money is lost, it isn’t so much fun.
Be smart, be well-read, be aware and be successful.
