Read the six myths of quarterly guidance and why short-term shareholderism is a no go when ensuring your company’s future in the sustainable economy.

An old saying among indigenous native Americans tells that every decision taken should look seven generations ahead. This wisdom is gradually being understood by executives, and for good reason.

When Paul Polman was appointed Unilever’s CEO in 2009, one of his very first decisions was to ditch quarterly reportings. The reason: he wanted the company to focus on long-term performance rather than short-term profits, in order to ensure investments in RD, IT and capital spending – and thus ensure the long-term resilience of the company.

The portion of companies issuing quarterly guidance has actually dropped from 36% in 2010 to 27.8% today.

When he publicly announced Unilever’s new policies, the company’s shares plummeted by 8%. But a majority of shareholders stayed with Unilever and accepted more long-term perspective in their investments. Today, 9 years later, the shares are up and the company has made long-term sustainable growth a celebrated trademark.

Paul Polman embodies a certain leadership trend and new way of doing business: where the ambition of growth goes hand in hand with the ambition of growing more sustainable. One clear example of this is that long-term roadmaps replacing short-term shareholder obsession. The portion of companies issuing quarterly guidance has actually dropped from 36% in 2010 to 27.8% today.

But despite this trend, we still see a market structure that incentivizes shorter term decision-making and companies that continue to champion so-called “shareholderism” at the expense of strong long-term performance. We have yet to see the markets, business sectors and the majorities of companies accepting the fact that the current growth paradigm as we have known it for decades have to change. According to the Business & Sustainable Development Commission’s landmark 2017 report, Better Business, Better World, flaws in today’s economic model “stand to significantly undermine the long-term stability and growth the world needs”.

Six myths about quarterly guidance

The report Moving Beyond Quarterly Guidance: A Relic of the Past? published by 2017 FCLTGlobal, has identified the six myths of quarterly earning guidance “that clearly make the case why short-term business strategies are, or at least should be, on the way out”:

Myth 1: Everyone does it.

Fact: The share of S&P 500 companies issuing quarterly guidance has declined from 36.0% in 2010 to 27.8% today. Among Euro Stoxx 300 companies, issuance is near zero (0.7%).

Myth 2: Issuing quarterly guidance improves companies’ valuations.

Fact: An analysis of S&P 500 constituents found no effect on valuation whatsoever.

Myth 3: Issuing quarterly guidance helps reduce stock price volatility.

Fact: Issuing annual range guidance reduces volatility around earnings reporting periods relative to issuing quarterly guidance.

Myth 4: Investors demand quarterly guidance.

Fact: Over 75% of surveyed investors say companies should move away from quarterly guidance. Fewer than 7% of investors want companies to offer guidance on any metric for periods of less than one year.

Myth 5: Quarterly guidance helps keep management teams accountable for performance.

Fact: It keeps them focused on short-term performance, but in the long term leads to under-investment and poor earnings growth.

Myth 6: There is no alternative.

Fact: Providing investors with a long-term roadmap of a company’s strategy over at least three to five years, combined with relevant financial and operating metrics, can give investors the confidence and transparency they need while avoiding short-term myopia.

The long-term roadmap

So, if not quarterly earnings, what should companies be communicating? According to the FCLTGlobal report, companies should deliver so-called “Long-term Roadmaps” which encompass core drivers for company business, clear visions for long-term performance and specific interim and long-term strategic goals tied to appropriate metrics that track the achievement of this vision.

Since Unilever ended short-term earnings guidance, they have been offering annual guidance tied to a longer-term strategic vision.

This kind of long-term roadmap is good business, according to recent research from Edelman Financial Communications & Capital Markets, a global financial communications and investor relations advisory firm. The Edelman Trust Barometer Special Report surveyed over 100 global chief investment officers and portfolio managers. Edelman’s survey of institutional investors found that:

• 68% agree that providing long-term guidance on financial performance positively impacts the trust they have in companies which they are, or may consider, investing in or recommending.

• 86% agree that focusing on short-term results does not benefit their investment strategies.

Since Unilever ended short-term earnings guidance, they have been offering annual guidance tied to a longer-term strategic vision. This guidance includes forecasts for “underlying sales growth, underlying operating margins, long-term cash conversion targets, return on invested capital and leverage expectations”. Another major company focusing on long-term strategic milestones is Facebook. They offer a three-, five- and ten-year plan, with specific KPIs for each horizon and strategic milestones over each period.