Those contemplating a change of policy should make clear their intentions ahead of time and spell out the rationale for changing course, as well as the alternatives that will be provided in future. For example, when Coca-Cola withdrew guidance in 2002, it gave ample notice and to assuage concerns reaffirmed the then-current consensus expectations for 2003. It also clearly articulated both what it would no longer be providing and, most importantly, what it would be supplying to the marketplace in future (insights into the company’s value drivers, strategic initiatives and factors that influence the company’s business and operating environment).
The issue of whether to give guidance is likely to be debated in many boardrooms, audit committees and C-suites rather than accepted as a fait accompli. Companies are keener than ever to focus investors on the long-term value of the business, something that requires both increased transparency and more effective communication around what drives value. The decision to stop giving guidance will therefore be more acceptable and more effective if a company’s overall investor communications are of a high enough quality to provide the market with these insights.
Views from the market The hedge fund “Removing guidance is annoying for hedge funds because it’s a good trading opportunity when companies miss their target. But there is no doubt that short-term guidance is not always conducive to building long-term value. Guidance is like a caffeine hit – it fulfills an immediate need but when the market has had a chance to digest the results later in the day and see how a company arrives at the number, the share price often falls.
Some of the best-understood companies are those that successfully talk about where they are trying to get to in the next three- to five-years. The problem is that this can be beyond the tenure of the existing management team – and a new team can come in and take the glory (or the rap!). What a company must not do is attempt through guidance to create a ‘floor’ for the share price: what happens on the day is often an amplification of how those shares have been trading in the market in the few weeks before the announcement – the market will tend to have factored in the various scenarios. It is not the removal of guidance which makes the share price fall, it is the surprise. Ironically, those companies which give guidance are generally the ones that don’t need to, and the ones that don’t are the ones that should.”
The (long only) fund manager “Investors and analysts are inclined to like guidance – without it the market can get nervous and share prices unpredictable. The question is how companies can withdraw it least painfully. If they do so they should talk about the long-term characteristics of their industry, the drivers of it, and their place within that. The danger is that this disregards the short term – and however long-term an investor you are, the short term aggregates to become the long term. In a way, giving guidance is dangerous, and stopping giving it is dangerous, too.
Companies should at least acknowledge that the short term can affect the long term, and they should be clear about which metrics they believe can influence the short term. Increased financial disclosure can help achieve this, though this does start to encroach on ‘competitively sensitive’ information which companies are loath to give.”
Read Guidance at Unilever