Warren Buffett and Jamie Dimon join forces to convince CEOs to end quarterly profit forecasts

Blog Author Email: bphelan@riskdirector.com

LinkedIn Profile: http://www.linkedin.com/in/bob-phelan

On June 7, 2018, CNBC provided a platform for two of the most successful CEO’s, Warren Buffett and Jaime Dimon, to influence other CEOs to end quarterly profit forecasts (Moyer).  No one can dispute that these two men are great leaders and great investors.  In fact, I am excited that they and Jeff Bezos will be addressing healthcare costs for all Americans by increasing the transparency of pricing and recommending improvements ranging from medical service delivery to prescription drug costs.

However, I am and always have been a risk manager.  Being a risk manager is a curse and a blessing. A curse in that you always must consider the upside and the downside before acting. A blessing in that you are never surprised or unprepared for most unexpected events.  Risk managers consider both sides of a strategic decision.

Let’s start with the positive side of this recommendation to end quarterly profit forecasts:

  • The actual quarterly metrics are going to be reported anyway so investors will see over time the impact of the CEO’s decisions. When quarterly profit forecasts are missing, stock price volatility will correlate with historical profit volatility but with a future uncertainty premium.
  • The CEO has more time to adjust to changing commodity prices, competitive threats, operational risk events, and economic conditions.
  • It reduces the CEO’s pressure to act in an uneconomic way. For example, The CEO may be forced to delay expenditures (marketing, R&D, or extend projects) or increase revenue (raise interest rate spreads, offer more rewards or lower prices) to meet the profit forecast.
  • It creates a level playing field for CEO’s and CFO’s that do not have the sophisticated P&L levers to alter results in the short term.

Let’s shine a light on the negative side of stopping quarterly profit forecasts:

  • Isn’t this solution to prevent corporate leaders from bad short-term profit behavior eerily similar to the change initiated by Wells Fargo to stop issuing internal sales goals (Keller). In a previous blog, I stressed the importance of strong risk culture and compliance oversight to reinforce how business should be conducted, which would have stopped the creation of 2 MM false accounts. No company will stop their internal profit forecasts. The Wall Street analysts will know where the company is trending and provide information to help institutional investors, but retail investors will be at a disadvantage.  By the way, where is Fidelity, Schwab, Raymond James, Ameriprise, TD Bank, and other advocates for the small investor on this subject?
  • Since the Business Roundtable is an association of chief executive officers and this change will enable CEOs to rely on their CFOs to explain why the results occurred. All results will be backward-looking, so the CFO is well-equipped to disclose all financial deviations from prior periods. The CEO will lose their ability to state the reality of the business environment clearly and what she/he is doing going forward.
  • What is the role of the Board of Directors? When CEOs wants to make short-term, uneconomic decisions to meet the profit forecast, what should the Board say?  How does this reinforce the oversight and fiduciary duties of the Board?  The Board compensates CEOs through long-term option grants for driving the right kind of growth in the company over time.  The stock price will reflect that growth with or without quarterly profit forecasts.
  • Finally, we will lose the CEO’s quarterly assessment of risk as reflected in the range of the profit estimates provided in a public forum for all investors regardless of their holding period.

In this age, where we are capturing data on every aspect of our lives and businesses, it seems that a CEO’s quarterly profit range provides a view into how the CEO is adapting to the vagaries of revenue, expenses, and economic conditions.   I do agree that CEO’s should not be measured solely by the volatility of earnings or how many quarters they met their targets.

The Business Roundtable is an association of chief executive officers of leading U.S. companies working to promote a thriving economy and expanded opportunity for all Americans through sound public policy (“Members”).  The Business Roundtable should concentrate on improved CEO communication of long-term results in a broader context rather than quarterly information to investors. CEOs could write their annual letter focusing on their results using the “Triple Bottom Line” approach, which includes profit, people (community, customers, employees, diversity), and sustainability (environmental, culture). The Triple Bottom Line is a better link to the objective of the Business Roundtable on Public Policy and CEOs can then set an example of proper leadership in society and politics.

 

 

References

Keller, Laura J and Jesse Westbrook. “Wells Fargo Eliminates Product Sales Goals for Retail Bankers.” Bloomberg, 13 Sept.  2016. https://www.bloomberg.com/news/articles/2016-09-13/wells-fargo-eliminates-product-sales-goals-for-retail-bankers.

 

“Members.” Essential Components of a Successful Education System | Business Roundtable, www.businessroundtable.org/about/members.

 

Moyer, Liz. “Warren Buffett and Jamie Dimon Join Forces to Convince CEOs to End Quarterly Profit Forecasts.” CNBC, 06 Jun. 2018. https://www.cnbc.com/2018/06/06/warren-buffett-and-jamie-dimon-join-forces-to-convince-ceos-to-end-quarterly-profit-forecasts.html.

“Triple Bottom Line.” The Economist, The Economist Newspaper, 17 Nov. 2009, www.economist.com/node/14301663.

 

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