Going by the international debate on the subject, it would seem that the Sebi chairman will get mixed feedback on guidance, especially about whether it amounts to forward-looking statements. It is well known that investment guru Warren Buffett does not believe in the practice. Companies such as Citigroup, Ford Motors and Google also do not provide earnings guidance, saying that it leads to a short-term focus of management, especially on their share price. CEO salaries are also increasingly based on these earnings numbers and a companys share price performance.
Interestingly, a whole set of companies have mastered the art of playing the game of tweaking earnings guidance to present themselves in the best light. Analysts recognise this as well, which is why any slip in meeting estimates causes turmoil in the share price. However, there is also a set of companies that is tired of such pressure and short-term focus on earnings alone and is dropping the practice of issuing guidance. Just because a company refuses to provide guidance, analysts will not stop projecting where its earnings and consequently its stock prices are headed. The moot question then is, will the lack of earnings guidance cause more volatility Earnings guidance by a company forces the analysts projections to be range-bound; without guidance there could be a wide divergence of views, fostering increased price volatility. While this is indeed a possibility, an analyst who is wildly off the mark will soon lose credibility and may even attract litigation.
In July this year, a report by the Business Roundtables Institute for Corporate Ethics and the CFA Institutes Centre for Financial Market Integrity opened the debate on the corrosive effect of short-term thinking in American business. It said 76% of the members did not want guidance. The report said, The obsession with short-term results by investors, asset management firms, and corporate managers collectively leads to the un-intended consequences of destroying long-term value, which decreases market efficiency, reduces investment returns, and impedes efforts to strengthen corporate governance.
Unscrupulous companies find innumerable ways of making forward-looking statements without providing an official earnings guidance
In India, where insider trading rules are fairly new, the more unscrupulous companies find innumerable ways of making forward-looking statements without providing an official earnings guidance. It could well happen that they welcome Damodarans view and drop their forecasts. They can then continue with the age-old practice of using media plants to manage their share price and image. In any case, analysts regularly track barely 250 Indian companies.