Earnings guidance and financial forecasting hit a crescendo over the past several weeks as the corporate earnings season moved forward. But when it comes to an earnings whiff, it won’t be just investors that suffer the consequences as financial executives at publicly traded companies endure some very real consequences.
One of the most public examples of a CFO falling on his forecasting sword is former Walgreens Chief Financial Officer Wade Miquelon. He left the company in July after he cut the forecast for Walgreen’s pharmacy unit earnings by over $1 billion. Miquelon sued the company last week, alleging he was defamed by news reports that suggested he was “personally responsible” for the forecasting error.
While the Walgreen’s case remains an open question, recent research shows executives crunching the numbers often suffer just as much as investors when it comes to forecasting errors and missed financial guidance given to Wall Street analysts.
Research released in 2012, for example, shows that CFOs missing the latest consensus analyst forecast were hit with “bonus cuts, fewer equity grants, and an increased likelihood of forced turnover.”
Let’s assume “forced turnover” is a euphemism for getting shown the door.
And even a near-miss in guidance can mean real consequences since the “penalty” is the same as big numbers whiff, according to the study titled “CEO and CFO Career Penalties to Missing Quarterly Analysts Forecasts,” which laid the responsibility squarely at the foot of many public company boards looking to simply match analyst estimates.
“[The] penalty for big misses does not differ from that of small misses,” the research says. “Because big misses more likely reflect poorer performance relative to small misses, we interpret this result as being consistent with boards fixating on just meeting the analyst forecast target.
“[Our] results are more consistent with the board myopically fixating on small meets than the board efficiently contracting with executives,” the research concluded.
While financial forecasting may be a valuable management tool, its impact on investors remains both a boon and a bust for publicly traded companies.
In the case of Apple, a rosy outlook on the upcoming holiday season and what it projects to be a blockbuster quarter is pushing its value ever higher. The company estimated revenue between $63.5 billion and $66.5 billion and called for increasing gross margins, according to the latest earnings release.
For IBM, the case is much different as it abandoned earlier financial guidance for all of 2015, moving away from a five-year profit plan, rethinking cash flow and unloading unprofitable businesses. The announcement immediately wiped out hundreds of millions in IBM value, as well as cutting nearly $900 million from a single investor: Berkshire Hathaway’s Warren Buffett, according to published reports.
To remove these big swings in the market, large institutional investors and financial professionals are pushing the idea of abandoning quarterly earnings guidance. One idea is the adoption of “Integrated Guidance,” which includes a combination of a five-year strategic plan and communications “about changes over time,” according to a proposal by Generation Investment Management, an investment management firm that focuses on sustainable investing.
But even they admit it will take time and a great deal of arm-twisting and CFO leadership to make it happen.
"Abandoning the practice of earnings guidance is a strategic decision directly affecting one of the responsibilities of the CFO," the research explains. "Consequently, the CFO needs to be fully on board and understand the strategic importance of this decision."