Australian public companies are increasingly backing away from giving the market, and their shareholders, guidance on where the profits will sit at the end of the year.
The trend has senior corporate figures worried.
They argue the CEO of a listed company is expected, along with a long list of skills, to be able to put together a believable forecast for the next 12 months.
They should be able to deliver on that forecast, hitting sales, expense, and profit numbers within a tight range.
This is a baseline skill and is part of a reason a chief executive gets paid more than anyone else in a company.
But many companies, some of them at the larger end of the scale, are avoiding guidance. The board of Woolworths last year said it would stop giving guidance after admitting it was getting its forecasts wrong.
Jason Preston, a partner at advisory firm and insolvency experts McGrathNicol, says not providing guidance sends a message.
“If you can’t reasonably predict the next 12 months, how do you make strategic decisions in your business?” he told Business Insider.
“And if you can predict it, and are just not willing to share it, then where are we at in terms of an informed market?
“If you’re not willing to give guidance then we will presume that it probably doesn’t look too good.”
Boards are more cautious
The number of companies disclosing earnings guidance has declined by 10 percentage points to 49% over the last three years, according to analysis by McGrathNicol.
Boards are more cautious, especially in industries where volatility makes future earnings more difficult to predict.
Directors also face heightened scrutiny by investors, increased regulatory requirements and the growing threat of shareholder legal action.
“If you look at who is disclosing, they are often the more reliable,” Preston says.
“And if you look at companies that don’t disclose, it’s not because they are doing well. It’s usually because they think there’s risk to the downside. Rather than risk getting wrong, they just don’t say anything.”
A matter of trust
Early in the business career of Christine Holgate, when she was doing investor relations, she was told that companies often stop giving guidance as soon as there’s a problem.
“Actually that’s the worst time to stop giving guidance,” the now CEO of Blackmores told Business Insider. “You need trust with your shareholders. That’s the challenge.”
Blackmores reports to shareholders quarterly. And as well as the annual general meeting, shareholders also get an informal opportunity for to meet the management team each May.
“So, shareholders receive regular updates on our business performance and progress on delivery of our strategy and can understand how we are tracking,” Holgate says. “Our approach to communicating with shareholders is about being transparent and frequent in the information we share.”
Retailing is one sector where the number of companies disclosing now is very low.
McGrathNicol looked at 15 listed retailers and found only three giving guidance, down from nine the year before, as this chart shows:
Michael McCarthy, chief market strategist at CMC Markets, says the rise of activist investor groups and an increasingly hostile media mean issuing guidance is seen as an “abuse to nothing” proposition by executives and boards.
“There is little to be gained from guidance that turns out to be correct, but potentially huge reputational, financial and regulatory risk in statements that are later proven wrong,” McCarthy said.
“Companies are now caught between the continuous disclosure obligations of corporation law and the desire to remain a small target, both corporately and personally.
“It seems very likely that companies will increasingly provide the smallest amount of info they can, satisfying the law, and no more.”
Getting it wrong has consequences. Slater and Gordon’s share price dropped through the floor and kept going when forecasts about its UK business fell over.
Another group of lawyers, Maurice Blackburn Lawyers, is looking at legal action by shareholders to recover their investment losses.
McGrathNicol acknowledges the risk of shareholder action.
But Preston says you have to work backwards and ask why are they getting it wrong. Why are they overestimating their performance?
“The reality is for a lot of sectors, it’s been a tough market for a few years and people have been told to forecast for growth,” he says.
Sometimes forecasting is influenced by internal company culture and an expectation for ever-increasing sales.
“There is optimism bias with business units wanting to defend themselves by putting together more optimistic numbers rather than face the alternative of having to cut costs,” says Preston.
“Often multiple levels of review are around a forecast and those reviews tend to be on the upside, with management assuming the business unit is low-balling the number, so they put a bit of stretch and in the next level of management does the same.”
By the time the budget is finalised, the numbers have little resemblance to any forecast that could realistically be achieved.
“We’ve been involved in some of those and there are a range of reasons why that happened,” says Preston.
“Often it has been that the guy on the ground knows you’re off budget on a project but getting that information up the chain is often challenged … it’s bad news and people want to make sure they understand it properly and it can take a while to filter up before it’s finally accepted.
“It is a difficult area and I think this is why we are seeing less and less companies giving guidance.
“But where I struggle with that is that if you look at most valuations it’s all about a multiple of future earnings. Yet here we have a very significant proportion of those companies not actually willing to provide any guidance of what those future earnings are.”
This next chart shows the decline in profit guidance by sector.
The latest McGrathNicol Guidance Report shows a continued decline with only 49% of profiled companies releasing earnings guidance in 2015, an 8 percentage point drop from 2014.
Of those companies that did release guidance, 64% were able to meet or exceed it, meaning the proportion of companies releasing accurate guidance fell 5% since 2014.
Only 30% of all companies sampled were able to release and achieve or beat guidance in 2015,
Buildings products (69%) and utilities sectors (67%) have the highest levels of disclosure.
The retail (20%) and media & leisure (23%) sectors are least likely to release guidance.
The sectors which perform best against guidance released are utilities, and food and beverage.