NIRI White Paper: Guidance Practices and Preferences

© 2013 National Investor Relations Institute

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(703) 562-7700 www.niri.org

Guidance Practices and Preferences

By Ariel Finno, Director-Research ([email protected]) Matt Brusch, Vice President-Communications and Practice Information

A NIRI White Paper

NIRI White Paper: Guidance Practices and Preferences


Overview

Since the turn of the century the number of legal and compliance complexities surrounding the issuance of corporate earnings guidance has markedly increased. A company’s decision on whether or not to issue earnings guidance or forward looking statements is an individual one, based on a myriad of unique variables. Before formulating an earnings guidance policy, corporate executives of publically traded companies need to become familiar with relevant legal and regulatory guidelines that have been released by the U.S. Securities and Exchange Commission (SEC). These regulations include (but are not limited to):

Securities Act of 1933 and Securities Exchange Act of 19341

Private Securities Litigation Reform Act of 1995 (PSLRA)2

Regulation Fair Disclosure of 2000 (Reg FD)3

Sarbanes-Oxley Act of 20024

Regulation G of 2003 (Reg G)5

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act)6

Several sources for earnings guidance information include:

“Giving Good Guidance: What Every Public Company Should Know” (Latham & Watkins, Oct.2012 report)7

“The Guidance Effect: Improving Valuation” (Sharon Merrill Associates, Aug.2012 report)8

NIRI Standards of Practice, Volume III: Disclosure (National Investor Relations Institute, April 2012)9

These and other relevant guidelines should be taken into consideration when drafting a company earnings guidance policy.

1 codified at 15 U.S.C. § 78.

2 Pub. L. 104-67, 109 Stat. 737.

3 Release Nos. 33-7881, 34-43154, IC-24599, File No. S7-31-99.

4 15 U.S.C. 7201.

5 Release No. 33-8176; 34-47226; FR-65; FILE NO. S7-43-02.

6 Pub. L. No. 111-203, 124 Stat. 1376.

7 http://www.niri.org/Other-Content/sampledocs/Latham-Watkins-Giving-Good-Guidance.aspx.

8 http://www.niri.org/Other-Content/sampledocs/Sharon-Merrill-The-Guidance-Effect.aspx.

9http://www.niri.org/Main-Menu-Category/resource/publications/Standards-of-Practice-for-Investor-

Relations.aspx


NIRI Guidance Research For investor relations (IR) professionals, providing forward looking guidance, or what most commonly is referred to as "earnings guidance," is a core concern. The practice extends far beyond the decision to communicate earnings per share (EPS) expectations – the degree of nuance in how each organization issues or does not issue guidance is considerable. NIRI regularly researches this subject in order to understand all facets of guidance practice and provide benchmarking data for best practices.

NIRI guidance surveys typically inquire about practices and preferences related to company guidance policy. The survey instruments are generally divided into one section on financial guidance (i.e. all quantitative economic measures of a company’s performance including earnings or EPS, revenue, cash flow, EBITDA, operating income, gross margin, expenses, CAPEX, tax rate, etc.), and another section on non-financial guidance (i.e. any information about current broad-market or business conditions that have the potential to impact company performance and are not typically reflected in a company’s financial statements). Additionally, the surveys inquire about the frequency of guidance (i.e. how often guidance is communicated and reiterated or updated) and the periodicity of guidance (i.e. the timeframe on which the company is providing forward looking statements, typically in the form of quarterly or annual estimates). Presented here are key findings from NIRI’s 2008, 2010 and 2012 guidance practices and preferences research projects.

2008 Key Findings

64% of NIRI respondents report providing earnings guidance compared to 51% in 2007 survey results and 66% in 2006.

70% of NIRI respondents provide broader financial guidance.

57% of NIRI respondents provide non-financial guidance.

The primary reason NIRI respondents indicated for providing all types of guidance is to ensure sell-side consensus and market expectations are reasonable.

Among NIRI respondents who do not provide quarterly earnings guidance, nearly three quarters refrain in order to focus on long term company performance.


In November 2010, NIRI released Public Company Forward-Looking Guidance Practices in 201010, which announced the results of its corporate member opinion data on the subject.

2010 Key Findings

90% of respondent companies provide forward-looking guidance in some form.

81% provide guidance on at least one financial measure and 48% provide non-financial guidance.

All forms of financial guidance are primarily provided as a range.

Those who do guide most often communicate annual estimates. The most common frequency for communicating those estimates is on a quarterly basis.

The most commonly cited reason for providing guidance was to increase transparency (82%).

Of the 10% that do not provide guidance, the majority (60%) has never given guidance.

Of those that do not guide, management philosophy (68%) is the primary reason.

NIRI again studied this subject in 2012 in order to assess the current state of guidance practices and preferences, and to review developing trend information. In September 2012, NIRI released Guidance Practices and Preferences-2012 Survey Results11.

2012 Key Findings

88% of 2012 respondents provide some form of guidance (either financial, non-financial or both), compared to 90% in 2010.

76% report providing financial guidance compared to 81% in 2010.

44% provide non-financial (broad market) guidance in 2012, a decrease from 48% reported in 2010.

For those who provide financial guidance, the most common time horizon is an annual estimate (no change from 2010 results). Additionally, the most common frequency for communicating estimates is quarterly.

10

http://www.niri.org/Main-Menu-Category/resource/publications/Executive-Alert/2010-Executive-Alert-

Archive/Public-Company-Forward-Looking-Guidance-Practices-in-2010-11410.aspx. 11

http://www.niri.org/Main-Menu-Category/resource/publications/niri-Analytics/Guidance-Practices-and-Preferences-2012-Survey-Report-9512.aspx?Site=niri.


NIRI Policy Statement - Forward-Looking Guidance Practices

NIRI has long advocated for public companies to provide full, fair and consistent disclosure of financial information to increase transparency, engender informed investor expectations and, ultimately, reduce volatility and lower the cost of capital. NIRI encourages companies to define their own unique set of financial and non-financial metrics. NIRI supports the notion that undue volatility around a short-term focus is undesirable and that all audiences - investors, financial analysts, the media - should focus on the long-term value drivers of businesses. The purpose of this policy statement, adopted by the NIRI Board of Directors in July 2008, is to enunciate this view and share it with external audiences. NIRI encourages public companies to provide a variety of information to assist investors with understanding and interpreting current results and assessing future prospects. Each public company must carefully consider its internal forecasting abilities, industry practice, the needs of the financial community and other constituencies in the context of stock exchange and federal disclosure regulations when establishing guidance practices as part of an effective disclosure policy. Such forward-looking information should cover a spectrum of time frames including long, medium and short-term, based on circumstances applicable to the company and industry. Once a company determines the breadth of financial and non-financial metrics that best disclose current and future prospects, NIRI recommends uniform disclosure to a broad spectrum of financial publics. NIRI does not propose, however, that a prescribed set of financial information or a particular format is suitable for every public company or every situation. NIRI recognizes that the decision of public companies to provide or not provide quarterly earnings per share guidance alone will not reduce the increasingly short-term focus of the marketplace, which may be as short as intra-day in some cases. Furthermore, the influence of additional factors such as quarterly reporting requirements, quarterly compensation targets of many investment managers, publishing of quarterly earnings estimates by financial analysts and media focus on public companies “beating” or “missing” these quarterly estimates continue to place undue emphasis on quarterly results. NIRI supports a focus on long-term business value drivers by all financial markets participants - public companies, financial analysts, investors and the media - a focus that will lead to reduced volatility and a lower cost of capital. Adopted by the NIRI Board of Directors July, 2008


More Information For complete survey results, please visit www.niri.org, or contact Ariel Finno, Director of Research, (703) 562-7678, [email protected].

About the National Investor Relations Institute

Founded in 1969, the National Investor Relations Institute (NIRI) is the professional association of corporate officers and investor relations consultants responsible for communication among corporate management, shareholders, securities analysts and other financial community constituents. The largest professional investor relations association in the world, NIRI’s more than 3,300 members representing over 1,600 publicly held companies and $9 trillion in stock market capitalization.

http://www.niri.org/

NIRI White Paper: Guidance Practices and Preferences

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