CEOs: What we pay attention to is what we create. True or False?

Larry Fink of BlackRock has issued his 2016 Corporate Governance Season letter to Fortune 500 CEOs. This season, on behalf of BlackRock’s $4.6 trillion AUM, Mr. Fink urges CEOs to stop the game of providing quarterly earnings guidance, as part of re-balancing focus to the longer term.

This is not the first time public companies have heard the plea to stop quarterly guidance, nor the first time they’ve heard a request to share their “strategic framework for long-term value creation” (e.g. see the March 2015 “Straight Talk” recommendations). But I hope BlackRock’s letter and the talk it generates will put the nail in the coffin on the quarterly guidance practice here in the US, a practice that has been described as the “most visible manifestation of an overly short-term orientation inside many public companies.” The world will be better served when all corporate boards and management are focused on creating long-term value for shareholders and society, while also delivering excellence today.

My career has concentrated on helping businesses use their power to create social and environmental good and economic returns. So why do I care about seemingly arcane matters as whether Company X will meet its quarterly estimate of $0.25 a share, beat it by 1 cent, or is the company issuing such guidance in the first place? 

Mr. Fink’s 2016 letter sums up why the arcane is important to me – and all of us who want to see flourishing companies in a flourishing world: “Generating sustainable returns over time requires a sharper focus not only on governance, but also on environmental and social factors facing companies today.”  

Recently, I’ve been reflecting on my years with Aspen Institute – and how quarterly guidance has repeatedly emerged in our efforts to generate awareness of economic short-termism as a barrier to business and societal sustainability. Mr. Fink’s letter provides the opportunity for public reflection, if you’d indulge me.

• Nine years ago a group of companies, investors, and governance gurus – led by my Aspen Institute colleague Judy Samuelson – issued principles for companies AND investors to create long-term value. The 2007 news headlines highlighted principle #2.2: “In pursuit of long-term value creation, companies and investors should. . . . Avoid both the provision of, and response to, estimates of quarterly earnings and other overly short-term financial targets.”
• I spent much of my first year with Aspen Institute collaborating with diverse organizations (including CFA Institute) that shared a similar concern about economic short-termism. Together we held an educational symposium at Bloomberg with best practices summarized in “Operating & Investing for the Long Term." Still relevant.  
• With the markets in a freefall, in late 2008, we co-organized a roundtable at the NYSE with Credit Suisse and friends. The sell-side and buy-side analysts said to the companies, “We don’t need your EPS guidance, but there is better information companies could provide (cf. Mr. Fink’s 2016 letter) and ways of providing it.” The next day, GE announced it was stopping the quarterly guidance drill.
• In late 2012, we convened two focus groups on earnings guidance with heads of investor relations and asset owners in NYC and London. Afterward, the Generation Foundation delved deeper, funding Harvard Professor George Serafeim’s astute assessment of the perceived benefits and costs of the guidance practice.
• Since September 2014, I’ve been spearheading a pilot group of public company CFOs and portfolio managers to “rethink the conversation” between companies and investors, along with Tim Koller of McKinsey. That group has gathered quarterly and is conducting its own research. “Long Term Voices” is not ready for prime time, but I will share two teasers here:

1.From an interview with a portfolio manager who oversees $25+ billion in long-only, equity investments:

“I see way too many IR (investor relations) programs where dealing with the investment community is like filling out their TPS Report, if that’s not too old an analogy from Office Space, the movie?. . . It’s a meaningless thing that has to be done at the end of every quarter and you kind of deal with it because it’s a necessary evil and then you move on. Then you get disappointed because your investor base isn’t as focused on long-term value creation as the management team. I think they (companies) are effectively digging their own grave when they do that.”

The portfolio manager continued, “Instead, you should have IR communications, as much as you can, share the metrics you think are important and TEACH us (investors) why those are important. Don’t communicate what’s not important. For example, guidance is communicating on their (the Street’s) terms versus providing the Street with realistic ways of evaluating your company.”

2. Tim Koller, a McKinsey expert on corporate performance who co-authored Valuation (now in its 6th edition), has repeatedly shared with our pilot group of companies and investors this message: “Short-term share price volatility or near-term, lower share prices may be a consequence of a longer-term focus for some companies, but those effects are short term, outweighed by the long-term value created.” (Insights from Tim & McKinsey colleagues on related topics abound, including how to avoid "the consensus earnings trap.”)

“People become what they pay attention to.”

This quote, I've found, holds true 80+% of the time. By extension, groups of people become what they pay attention to: if a company fixates on the short term, the company and its managers will most likely become short term. To maximize what your company can deliver to your shareholders and the world, I say, go long. I think Mr. Fink and many other savvy investors would back me on this one. 

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Looking Ahead?

1. Check out the post from my colleague Judy Samuelson who reacts to Mr. Fink’s latest letter and focuses on the wider enabling environment for value creation.
2. We’re currently testing a concept for a new Long Term Strategy Group to include operating companies ($2.5bn+ in revenue) and larger investors. Drop me a note at the Aspen Institute if you’re interested in learning more.

Photo Foreground: Green Gentian plant that blooms once in 40 years. Background: The Maroon Bells in Aspen, Colorado. 

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Rebecca K. Darr is dedicated to helping businesses use their power to create social, environmental & economic returns by innovating for positive change. She is a Senior Fellow at the Aspen Institute Business & Society Program (since 2007) and co-founder of Atayne, a certified B Corp, which makes progressive performance apparel. Previously, Rebecca was a consultant with Deloitte. She holds a BA from Rice University and a MBA from the University of Michigan.