By Cydney Posner

A Financial Times article on June 17, 2007 describes the effort by a coalition of business and labor leaders to seek to end the use of quarterly earnings guidance. One of the key purposes of the action is to address the concern that the current focus on quarterly results is hampering U.S. companies' long-term prospects and economic competitiveness.  The coalition will also call for an overhaul in compensation practices to reward corporate and fund managers for long-term performance. 

These ideas are reflected in the  Aspen Principles from the non-profit Aspen Institute. The Principles offer guidelines for corporations and investors for long-term value creation.  Among these are advocacy of a de-emphasis on short-term financial metrics, such as quarterly EPS, and emphasis on specific forward-looking metrics that the board of directors determines are appropriate to the long-term, strategic goals of the firm and that are consistent with the core principles of long-term sustainable growth and long-term value creation for investors. More specifically, the Principles urge companies to communicate on a frequent and regular basis about business strategy, the outlook for sustainable growth and performance against metrics of long-term success (with a five-year horizon) and to avoid both the provision of, and response to, estimates of quarterly earnings and other overly short-term financial targets, including neither supporting nor collaborating with consensus earnings programs that encourage an overly short-term outlook.  (While this advice may work well for the IBMs of the world, smaller companies that have difficulty attracting a following from financial analysts may find the practice somewhat perilous.) 

The Principles also advocate that executives be compensated largely for the results of actions and decisions within their control, based on metrics of sustainable long-term value creation, including structures such as stock ownership guidelines, hedging prohibitions and clawbacks.  Compensation should be fair, rational and effective, with a eye toward the possibility of reputation risk arising out of excessive pay packages.  While these ideas are hardly novel, they do represent a useful summary of current corporate governance best practices.

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