Fmr. Walmart CFO: Balancing Short-term Performance and Long-term Shareholder Value
The next quarterly earnings season is underway, and with it comes the usual news and handwringing over which companies “hit” or “missed” their earnings guidance. It also renews the debate over whether providing quarterly earnings guidance pushes short-term performance over long-term growth and shareholder value.
Have financial markets become too obsessed with quarterly earnings forecasts? That’s a question not only for management to consider, but for investors who seek long-term shareholder value. Their voice needs to be heard in the debate.
The latest attempt to dispense with quarterly earnings guidance came in July from a group of prominent CEOs and asset managers, who proposed a new code of corporate governance practices, arguing that public companies should not feel obligated to provide quarterly earnings guidance because it can distort management’s priorities.
Over my career as a CFO, and head of corporate strategy and development, treasury and investor relations at a large, publicly traded company, I’ve experienced up close the frustrations and pressures around quarterly guidance. Even when coming within a cent or two of the top end of a guidance range, some analysts saw that as entirely missing estimates. I often asked myself, what’s the point of setting a target range if coming within the range was going to be viewed as failure? Frustrating to say the least.
But whether businesses and investors like it or not, this is the reality in which public companies operate and compete for market share. Regardless of whether a company issues earnings guidance, when it comes to executing a growth strategy, staying focused on the long-term and not getting distracted by short-term performance pressures takes effort, discipline and strong communications, both internally and externally. I personally believe that quarterly guidance, when done appropriately, can help leaders foster a company culture that emphasizes long-term shareholder value over purely short-term performance, and build the alignment, discipline, and accountability that are needed across the organization to execute a long-term strategy.
Getting to execution starts in the same place as setting strategy, with leadership sitting down together to figure out and agree on how to sustainably grow and build shareholder value. That might mean undergoing a major business transformation that could take out hundreds of millions in profits over the next several quarters and push down the stock. Not an easy decision, but it’s management’s responsibility to make the tough choices to build shareholder value. At the same time, it’s critical for management to communicate to the investment community what they’re doing, why they’re doing it, and how they’re going to execute to get to the end goal.
During those times when a company is making significant changes to pivot the business in order to create long-term shareholder value, earnings guidance can be used to help investors stay focused on the strategy. Having to issue earnings guidance on a routine basis can help hold leadership accountable to hitting key milestones for executing the plan. It can also help enforce accountability and discipline throughout the organization, keeping individual business unit leaders aligned to the long-term strategy. And earnings guidance can help management keep up a regular cadence for communicating the expected long-term benefits and messaging how they will execute to get there, and how the current results fit that strategy—or if they don’t, what they’re doing about it.
There is value in issuing quarterly performance guidance, so long as it is done within the context of how the company is progressing against long-term goals. Inevitably, some quarters will be worse than others. Still, when management uses guidance to stay laser-focused on the long-term, and to consistently report to stakeholders—investors, employees, customers, suppliers and others—progress against strategy, as well as results, it can help gain and sustain trust. Moreover, it can help develop a corporate culture that continually builds shareholder value and one that is resilient to whatever short-term pressures come along the way.
Charles Holley, retired CFO of Walmart, serves as an independent senior advisor to Deloitte LLP and as CFO-in-Residence of the CFO Program, providing guidance and counsel to staff, clients, and senior leadership. He also serves on the Dean’s Advisory Board for the McCombs School of Business at the University of Texas at Austin and the University of Texas Presidents’ Development Board, as well as the University of Texas system Chancellor’s Council.