Berkshire Hathaway Chairman Warren Buffett and JP Morgan Chase Chief Executive Officer Jamie Dimon argued Thursday that public companies should stop providing guidance on future earnings.
Corporations that trade on the stock market give investors an update on the state of the business each quarter, including revenue growth and net income from the prior three months. As part of that, the companies routinely provide an estimated earnings outlook for subsequent quarters and the remainder of the year as a whole.
Dimon said the practice could lead businesses to pursue more risky ventures.
“It can often put a company in a position where management from the CEO down feels obligated to deliver earnings and therefore may do things that they wouldn’t otherwise have done,” he said during a CNBC interview.
Buffett called it a “very bad practice” and said it can cause executives to inflate projections.
“I’ve never seen a company whose performance has been improved by having some forecast out there by the CEO that we are going to earn X,” he said. “It’s teaching the people that work under him or her that quarterly performance is the end-game.”
Buffett is famously known for maintaining his same investments for decades. The 87-year old investor said he tells his associates to pretend that each company they invest in “is the only business you or your family is going to own for 50 years.”
Dimon, who is also chairman of the lobbying group Business Roundtable that includes companies like American Airlines, 21st Century Fox and Apple, said 60 percent of the member businesses provide annual earnings guidance.
“I would personally eliminate that to one day,” he said, adding that only 20 percent provide quarterly guidance.
Earnings guidance has become a key benchmark of performance and a poor quarter could spur serious questions over the future of the business, as well as send the stock spiraling. Companies also periodically update their guidance in-between earnings calls to reflect continued volatility in the market or improved conditions.
Dimon argued that businesses could take shortcuts, like cutting marketing budgets, or resist expansion plans in order to hit targets that would appease investors.
