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August, 2006

 

Report: Break the ‘Short-Term Obsession’ Directors & Boards, August 2006
	In a report released in July, the CFA Centre for Financial Market Integrity and the Business Roundtable Institute for Corporate Ethics have jointly called on corporate leaders, asset managers, investors, and others to break the "short-term obsession" harming shareholders' interests by reforming practices involving earnings guidance, compensation, and communications to investors. The report outlines five broad areas of recommendations, including reforming earnings guidance practices and developing long-term incentives across the board.
Tambalea el Ritual de las Previsiones Empresariales El Cronista Comercial, August 3, 2006 By Francesco Guerrera
	“La obsesión por el rendimiento a corto plazo no crea valor para los accionistas y, en muchas ocasiones, lo destruye”, señala Dean Krehmever, director ejecutivo del Business Roundtable Institute y uno de los autores del informe.
Economie met de verrekijker Knack, August 2, 2006 By Door Frank Demets
	Het was een kort berichtje op de voorpagina van De Tijd. Maar eigenlijk predikt het revolutie. 'Wall Street wil van de kwartaalfocus af', stond er. Want zowel het Business Roundtable Institute for Corporate Ethics (BRICE), een clubje van 160 invloedrijke Amerikaanse bedrijfsleiders, als het CFA Institute, een amalgaam van 83.000 analisten en vermogens- beheerders wereldwijd, smeken Amerika's beursgenoteerde bedrijven om nu eindelijk eens op te houden met die verstikkende winstprognoses per kwartaal.
Beware of what lurks if companies fixate on estimates St. Petersburg Times, August 4, 2006 By Ellen Simon
	"If you're managing earnings, and you miss by a penny, there must be a lot there," said Jeffrey Diermeier, president and CEO of the CFA Institute. Just as seeing one cockroach is a sign there are many more, accounting tweaks seldom travel alone. The CFA Centre for Financial Market Integrity and the Business Roundtable Institute for Corporate Ethics recently issued a set of recommendations crafted to end what they call "short-termism," one symptom of which is the boosting and busting of a stock based on its quarterly earnings.
'Frequent filers' forge long-term focus Crain's Cleveland Business, July 31, 2006 By Scott Suttell
	Mr. King was among those who participated in a series of symposia on short-termism that led to an impressively detailed report produced by the CFA Centre for Financial Market Integrity and the Business Roundtable Institute for Corporate Ethics. The panelists included John Bogle, founder of The Vanguard Group, and executives from Citigroup, TIAA-CREF and Xerox, among others. The report, at www.cfapubs.org/toc/ccb/2006/2006/1, urged changes in practices related to financial transparency, communication with investors, management incentives and, particularly, earnings guidance.
Devil or angel? Ethicists debate Wal-Mart The Atlanta Journal-Constitution, August 13, 2006 By Matt Kempner
	Another panelist, ethics academic Pat Werhane of DePaul University and the University of Virginia, said Wal-Mart relies on suppliers using overseas sweatshops where workers make wages far below prevailing pay in those nations. The company's practice, she said, takes from some of the poorest nations to give to people in the United States. "I happen to think that's extremely unethical," she said.
Business and short-termism - Taxation as education Ethical Corporation, August 2006
	A sliding scale of declining taxation would take care of the period in between. Of course the definition of short and long-term will vary by industry, but we could establish industry averages. So perhaps the automobile industry gets a ten-year holding period, while the video game industry gets two years. And we have to account for hardship. Congress could draft an exemption from punitive taxation for those who can demonstrate that financial necessity drove them to sell their stock early. But the new law would reward the long-term investor while imposing costs on short-term behavior.
When Bad Things Happen to Good Earnings The Star-Ledger, August 10, 2006 By Shira Ovide
	Many business leaders would welcome such a change. "My chairman and CEO has a quote that he reminds us of all the time," UPS spokesman Norman Black said. "We have to manage and set strategy for this company for the next quarter-century, not the next quarter."
Quarterly earnings guidance - The long view on ‘short-termism’ Ethical Corporation, August 2006
	Reforms to address short-termism, Krehmeyer says, must be multifaceted and involve the many stakeholders who participate in capital markets. In addition to eliminating quarterly earnings guidance, a practice unique to the US, the groups are calling for companies to align executive compensation with long-term goals and shareholder interest, improve disclosure of asset managers’ incentive metrics and fee structures and endorse long-term investment statements that more clearly explain a company’s operating model. Law professor Lawrence Mitchell, director of the Sloan Program for the Study of Business in Society and the International Institute for Corporate Governance and Accountability at George Washington University, applauds the report and its conclusions as a step in the right direction on short-termism.
Investment industry groups: Focus on long term  Investment News, August 7, 2006 By Aaron Siegel
	``There has been a concern that there is short-term pressure [on companies to report earnings],'' said Ann Yerger, executive director of the Council of Institutional Investors in Washington. ``The point is to get a dialog started and to recognize that there are lots of contributors to the problem. The paper was a good step, because it was a diverse crowd, and there are no easy answers,'' Ms. Yerger added.
A guide, not a promise BRW, August 17, 2006 By Paul Kerinpkerin
	McKinsey claims guidance is "misguided" because it generates no shareholder value, but it does generate big costs. Yet many executives are reluctant to discontinue profit guidance; they worry about its effect on shareholder value, share price volatility and analyst following. But empirical evidence seems to placate these fears. There is no difference, on average, in shareholder returns or share price volatility between companies that provide profit guidance and those that do not. Beginning or ending the practice has no effect on shareholder value or share price volatility; and the provision of profit guidance does not affect analyst coverage.
Gimme Guidance Forbes.com, August 22, 2006 By Vahan Janjigian and Michael Ozanian
	In recent months, the move against quarterly guidance has become all the rage. The CFA Institute, the Business Roundtable, the Chamber of Commerce, the National Investor Relations Institute, members of Congress and Securities & Exchange Commission Chairman Christopher Cox have all sounded the alarm bell against companies providing quarterly earnings guidance to Wall Street and shareholders. According to this crowd, guidance causes management to focus too much on the short term and not enough on the long term.
Is 'the number' worth it?: Some notable firms refuse to play the quarterly guidance game Baltimore Sun, August 6, 2006
	Eighty percent of chief financial officers in a recent survey said they would decrease spending on research and development, advertising and maintenance to meet an earnings target. Fifty-five percent said they would delay starting a new project to do so. The survey by three economists, including John R. Graham of Duke University, queried 400 CFOs. Superstar investor Warren E. Buffett, long a detractor of CEOs predicting earnings growth, said in his widely read letter to shareholders a few years ago that if tweaking operations to get earnings in line doesn't work, CEOs sometimes resort to accounting shenanigans. (This story also appeared in Black Enterprise Magazine, Chicago Tribune, RedOrbit and TMCnet.com)
A marketing ride together: McDonald's, GM cause stir with Hummer toys in Happy Meals SouthBendTribune.com, August 30, 2006 By Heidi Prescott
	Companies like McDonald's have to be careful about possible implications from partnerships they forge, said Patrick Murphy, professor of marketing at the University of Notre Dame and director of the Institute of Ethical Business Worldwide. "Sure kids have influence on their parents, but I doubt they have that much influence," he said, noting how the campaign likely was more focused on gaining exposure of the Hummer brand than changing buying behavior.
Business ethics series begins: ND faculty's presentations launch on Sept. 5 SouthBendTribune.com, August 29, 2006
	Its purpose is "primarily to show our students that it is possible to be ethical in business and succeed," said Patrick Murphy, professor of marketing and co-director of the Institute for Ethical Business Worldwide. The speakers will have a positive message for students, many of whom often read negative articles about unethical business people, Murphy said.
Notre Dame Provides Ethics Guide to Job Seekers, Employers Inside Indiana Business, August 22, 2006
	Patrick Murphy, professor of marketing and co-director of the Institute for Ethical Business Worldwide at the University of Notre Dame, has written a brief guide on ethics for the recruitment process to inform job seekers and recruiters. The guide covers the benefits of ethical work environments, includes sample questions which recruiters and job seekers can pose during an interview, and lists unethical behaviors to be avoided. “This guide will be widely used and valued by our organization in its recruiting efforts,” said Harold Tinkler, chief ethics and compliance officer for Deloitte & Touche USA. “The clear, simple and professional approach for providing guidelines to both interviewers and interviewees will help us to more fully integrate ethical considerations into the interview process.”
Study: Rules don't equal more Web safety United Press International, August 3, 2006
	Jamal's research involved an analysis of the top 100 business Web sites in the United States before recently passed laws regulating tracking and selling of information had taken effect. Working with Norman Bowie of the University of Minnesota, Jamal compared the U.S. results with the results of an analysis of the top business sites in the United Kingdom, where the government regulates the actions of online operators. (Also appeared in PhysOrg, Playfuls, Polical Gateway, RedOrbit, and The Washington Times)
How short-term thinking causes whirlpool effect: Ken Symon on Guidance Obsession TMCnet.com, August 1, 2006
	As Steve Odland, chief executive of the retailer Office Depot and head of the Business Roundtable corporate governance taskforce put it: "Once a company puts a number out there, everybody within the business is focused on hitting the guidance rather than doing what is best for the company." Companies should forget the short-term and make the decisions and take the actions that will see the long-term growth of the business: real growth rather than a bit of a fudge and a gentle fiddle to make the quarterly numbers.
Stop with earnings estimates, already The Cincinnati Post, August 1, 2006 By Ellen Simon
	Other ways to break the short-term cycle: The organizations are working on a recommendation for a model earnings release, which would standardize earnings reporting. It would contain the company's actual earnings under Generally Accepted Accounting Principles (GAAP), a summary balance sheet and a summary cash flow statement. Because earnings numbers include so many estimates, giving a reporting company so much wriggle room, former Securities and Exchange Chairman William Donaldson suggested companies release a range representing quarterly earnings and report what assumptions they used to reach those numbers. (This story also appeared in The Kentucky Post)
To a Startling Degree, Ratings of Stock Analysts Influence Whether Top CEOs Keep Their Jobs, Study Finds Academy of Management, August 2006
	Another example, she says, is Hewlett-Packard. "Obviously, Carly Fiorina's unique personality makes this a special case, but, as with Newell Rubbermaid, the CEO was embarking on a major redirection in company strategy requiring a long-term perspective. Here again, the lack of financial payoffs, so vexing to Wall Street, evidently led the board to take action, and here again the successor CEO has followed the same basic strategy as his predecessor. It leads one to question why the predecessor had to be let go, particularly when the stock is now up nicely without any real change in the company's course." The paper, entitled "Investment Analysts, Market Signals, and their Impact on CEO Dismissal," will be among thousands of studies presented at the Academy of Management meeting.
Business - Ryanair: cautious or crying wolf? Eagerness to avoid share turbulence sees airline play safe on strong results Sunday Tribune, August 6, 2006 By John Mulligan
	But Dean Krehmeyer, executive director of the Business Roundtable Institute for Corporate Ethics, makes an interesting point. "Short-termism," he said, "cuts across an enterprise and results in management actions - including reductions in research and development, and the foregoing of strategic investments - all in order to make the quarterly number." While the call for an end to quarterly reporting has some definite merit, don't expect it to happen any time soon. At least if investors have anything to do with it.

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