Strategic CSR - Earnings guidance

Well, this isn't exactly the rationale I was hoping for, but the article in the url below notes that more companies are refusing to issue quarterly earnings guidance -- a blow to the short-term thinking (and misguided focus on shareholder value) that dominates our economic system: 

"Et tu, Walmart. Analysts covering the world's largest retailer will have to sharpen their pencils now that it has joined several other companies in scrapping quarterly earnings guidance (it kept it for the full year)."

It seems that the uncertainty injected into the economy, in recent months, is the 'excuse' CEOs are drawing on to avoid the glare of quarterly expectations:

"'Uncertainty' is practically a dirty word on Wall Street. After competitors scrapped their public forecasts, United Airlines instead took the unusual step last month of publishing two scenarios—one for a recession and another for an expansion."

As the author notes, however, the better approach might have been to scrap earnings guidance (i.e., not earnings reports) altogether:

"Unfortunately, that is a luxury mainly available to elite CEOs who are extremely secure in their jobs: Apple's Tim Cook, JPMorgan Chase's Jamie Dimon and, of course, Warren Buffett, who recently announced his impending retirement after six decades running Berkshire Hathaway."

Such a narrow focus on shareholder value, of course, is a relatively recent phenomenon, driven by neoliberal economic theory in the twentieth century (which resulted in most CEOs today being paid using stock options). But there is a strong argument to say that, not only is shareholder value a theory (rather than a legal fact), but that a singular (or even primary) focus on delivering it can be counterproductive to the long-term interests of the organization:

"Henry Singleton might be the greatest example of an executive who delivered with minimum regard for what Wall Street thought. Teledyne, the conglomerate he founded and ran for almost three decades, was a hot stock in the 1960s. … He was 'the smartest businessman I ever knew,' said the late Charlie Munger, who was vice chairman of Berkshire Hathaway."

 

Broad stakeholder support for not issuing guidance, particularly from the board and other key stakeholders, is what is required for CEOs to have the confidence to make decisions for the medium to long term, which is how the optimal level of value is created. While somewhat regular earnings reports are essential to allow for adequate oversight and governance mechanisms, quarterly earnings guidance is an unnecessary legacy of a disproportionate focus on shareholder value, which can be unhealthy, as noted in the article in the second url below:

 

"What would not be painful: a voluntary reduction in 'quarterly guidance,' or forecasts, by executives about how they expect their companies to fare. Warren Buffett of Berkshire Hathaway and Jamie Dimon of JPMorgan Chase recommended this change in a Wall Street Journal essay in 2018. Companies routinely use these forecasts to manipulate the expectations of financial analysts so that when earnings reports ultimately arrive, they constitute 'positive surprises' that set off rallies in the companies' shares."

 

While the article in the third url below suggests this development is gaining momentum and possibly being extended to earnings reports:

"The Securities and Exchange Commission is preparing a proposal to eliminate the requirement to report earnings quarterly and instead give companies the option to share results twice a year, according to people familiar with the matter. The regulator could publish the proposal as soon as next month."

 

Take care

David

 

David Chandler

Strategic Corporate Social Responsibility: Sustainable Value Creation (6e)

© Sage Publications, 2023

 

Instructor Teaching and Student Study Site: https://study.sagepub.com/chandler6e  

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: https://strategiccsr-sage.blogspot.com/

 

Elite CEOs Don't Need Earnings Guidance

By Spencer Jakab

May 16, 2025

The Wall Street Journal

Late Edition – Final

B12

https://www.wsj.com/business/elite-ceos-dont-need-earnings-guidance-a0e5de93

 

Is The the Time to End Quarterly Earnings Reports?

By Jeff Sommer

October 5, 2025

The New York Times

Late Edition – Final

BU4

https://www.nytimes.com/2025/10/02/business/trump-earnings-reports-investing-stocks.html

 

SEC Prepares Proposal to Eliminate Quarterly Reporting Requirement

By Corrie Driebusch

March 16, 2025

The Wall Street Journal

https://www.wsj.com/finance/regulation/sec-prepares-proposal-to-eliminate-quarterly-reporting-requirement-1d700bbb

Strategic CSR - Whistleblowing

One upside from the pandemic and associated lockdowns, according to the article in the url below, is an increase in workplace related whistleblowing:"

The proof is in the data, with the U.S. Securities and Exchange Commission receiving 6,900 tips alleging white-collar malfeasance in the fiscal year that ended Sept. 30, a 31% jump from the previous 12-month record. Officials at the agency, which pays whistle-blowers for information that leads to successful investigations, say the surge really started gaining traction in March when Covid-19 forced millions to relocate to their sofas from office cubicles."

It seems that the enforced social distance has lowered employees' inhibitions about voicing their concerns:

"The isolation that comes with being separated from a communal workplace has made many employees question how dedicated they are to their employers, according to lawyers for whistle-blowers and academics. What's more, people feel emboldened to speak out when managers and co-workers aren't peering over their shoulders."

Of course, the lowering of employees' inhibitions may also have been aided by the financial rewards associated with those reports that lead to a successful prosecution:

"Since the pandemic hit the U.S., the agency has paid out some $330 million in awards, including an eye-popping $114 million to a single tipster in October. While the payments are tied to SEC investigations that almost certainly predate coronavirus, the amount of money going out the door is unprecedented in the decade since the regulator started its whistle-blower program."

For firms, of course, this heightened risk merely increases the value of having effective ethical cultures and compliance programs:

"For corporations, the rise in tips risks triggering a consequence from work from home that will last long after employees return to the office. Even if few of the tips lead to SEC enforcement cases, companies could still be dealing with years of compliance distractions as the agency launches investigations, subpoenas documents and grills senior executives."

But, while the pandemic appears to have sharpened our ethical antennae, the pathway that led to the elevated reporting levels currently being recorded appears to be the financial rewards that the SEC was empowered to offer as part of 2010 Dodd-Frank Act:

"Under the program, tipsters can receive financial awards if they voluntarily provide unique information that results in an enforcement action. Payouts can range from 10% to 30% of the money collected in cases where sanctions exceed $1 million. Awards are paid from a fund set up by Congress -- not money owed to harmed investors."

It seems that the prospect of a large payout may be more persuasive than either an ethical conscience or the inability to live with the guilt of knowing you have witnessed wrongdoing:

"Leveraging whistle-blowers has become one of the SEC's most potent tools for rooting out financial crime, despite the fact that most of the tips the SEC receives don't lead to enforcement cases. Information has come from more than 100 countries, with whistle-blowers providing evidence such as texts, emails and recorded calls."

Take care

David

David Chandler

Strategic Corporate Social Responsibility: Sustainable Value Creation (5e)

© Sage Publications, 2020

Instructor Teaching and Student Study Site: https://study.sagepub.com/chandler5e 

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: https://strategiccsr-sage.blogspot.com/

Whistle-blowing Soars to Record with Americans Working from Home

By Matt Robinson and Benjamin Bain

January 12, 2021

Bloomberg

https://www.bloomberg.com/news/articles/2021-01-12/whistle-blowing-soars-to-record-with-americans-working-from-home

Strategic CSR - LTSE

The article in the url below reports on the latest developments with the proposed Long Term Stock exchange (LTSE):

 

"The founders of the Long-Term Stock Exchange (LTSE) want to operate a full-fledged US stock exchange, with a twist: The exchange aims to combat short-term thinking by introducing extra rules designed to reward long-term shareholding and long-term business strategies. The LTSE and Investor's Exchange (IEX) disclosed today that IEX, an upstart exchange already operating under US Securities and Exchange Commission approval, last week formally filed with the SEC for the LTSE to handle initial public offerings via special securities listings on IEX."

 

It is interesting that they are working with IEX, which is the stock exchange set-up by Brad Katsuyama to try and compete against the high-frequency trading algorithms (and featured in Michael Lewis' book, Flash Boys). The goal is to open an independent stock exchange with a long-term, sustainable focus:

 

"By piggybacking on IEX, the LTSE hopes to accelerate the ability of companies to go public with the LTSE's rules binding them and their investors. The LTSE plans to submit an application to become a full-fledged stock exchange, a significantly tougher proposition, after the SEC has ruled on its arrangement with IEX."

 

While certainly well-intentioned, I think the LTSE contains flaws that are similar to the Benefit Corporation project. First, if the main purpose is to raise money (as the founder states it is), there are many alternative sources of capital today. It is not clear that we need another stock exchange for IPOs:

 

"The LTSE, founded by San Francisco entrepreneur and The Lean Startup author Eric Ries, is an ambitious project to overhaul how companies raise money, allow employees to sell shares, and practice good corporate governance. It comes amid challenges to Wall Street's traditional approach to financing businesses, with many companies shunning public markets altogether, while others turn to newfangled fundraising methods like cryptocurrency initial coin offerings instead of stock offerings."

 

Second, the rules mentioned in the article seem pretty superficial. The most important, I think is the restriction on short-term incentives.

 

"The rules for companies listing via the LTSE include:

• Increased voting rights for shareholders who hold company stock for long periods of time
• Restrictions on offering short-term incentives to executives
• Additional disclosures, such as clearly showing the impact of any stock buybacks
• A board-level long-term product and strategy committee, to focus on issues of governance and sustainability"

It will be interesting to see if that gets any traction. A stronger rule would be no stock-based compensation at all, which is what I would like to see firms adopt. If I can do my job without performance incentives, I am not sure why executives cannot. Just pay them a salary! But, this speaks to a more fundamental issue, which is that all firms can already adopt these measures, if they wanted to:

 

"The LTSE acknowledges in the SEC filing that companies could voluntarily adopt the rules it has drawn up without listing through the LTSE. But it contends that the structure it has created allows for regulatory enforcement of the rules, giving them more impact."

 

Finally, I am somewhat sympathetic to the argument in the article that we might lose some of the shareholder oversight. Short-sellers, in particular, perform a valuable buffer against corruption:

 

"Critics say that the LTSE's rules would overly insulate company executives from shareholders, reducing the accountability that can help boost performance over the long term."

 

While I do not trust shareholders much, I am not sure I would rather trust executives to act with any less oversight than at present! :-)

 

Take care

David

 

David Chandler

Strategic Corporate Social Responsibility: Sustainable Value Creation (4e)

© Sage Publications, 2017

 

Instructor Teaching and Student Study Site: https://study.sagepub.com/chandler4e

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: https://strategiccsr-sage.blogspot.com/

 

 

The company aiming to create a long term-focused stock exchange has applied to handle IPOs

By Kevin Delaney

March 19, 2018

Quartz

https://qz.com/1232025/eric-riess-ltse-which-aims-to-create-a-new-us-stock-exchange-has-filed-with-the-sec-to-handle-ipos/

 

Strategic CSR - Walmart + bribery

The article in the url below revisits Walmart's bribery scandal in Mexico (see Strategic CSR – Walmart in Mexico and Strategic CSR – Walmart), which I thought had wrapped-up a long time ago:

 

"Wal-Mart Stores Inc. tried and failed to settle a foreign-bribery probe that has stretched for five years and cost the company more than $820 million, according to people familiar with the federal investigation."

 

Since its original focus on operations in Mexico, the scope of the investigation has broadened considerably, which explains the growing cost to Walmart:

 

"The Justice Department and SEC investigations were largely driven by a 2012 series of articles in the New York Times portraying details of possible misconduct at Wal-Mart in Mexico. The investigation spread to other regions where Wal-Mart does business, including Brazil, India, and China. A final settlement is expected to cover multiple countries, the people said."

 

Apparently, towards the end of a presidential administration, firms with outstanding investigations push to settle them with the team they know (and who are familiar with the history of the case), rather than wait for the incoming team that may impose different and more burdensome terms. In this case, Walmart was unable to reach agreement with the DoJ and SEC before Obama left office:

 

"'Wal-Mart and the government are very far apart in terms of a settlement,' one of the people [familiar with the federal investigation] said Thursday."

 

Apart from learning that this investigation was still ongoing, however, I was more interested to see what appears to be the main obstacle to a conclusion:

 

"The people familiar with the probe said one major sticking point has been Wal-Mart's eligibility to continue accepting food stamps in its 5,300 Wal-Mart and Sam's Club stores in the U.S. after a settlement is reached. A company that pleads guilty to a federal crime can lose its right to win government contracts -- a penalty that could block Wal-Mart from the $71 billion food-stamp program. The retailer, one of the largest sellers of groceries, is also one of the biggest beneficiaries of food-stamp spending."

 

How important, exactly, are food stamp customers to Walmart?

 

"The loss of food-stamp shoppers would be a blow to Wal-Mart, which each year receives some 18% of the money spent through the Supplemental Nutrition Assistance Program, or SNAP. That represented about $13 billion in sales last year."

 

Although this is a small percentage of the firm's almost $500 billion annual revenues, it still represents a significant transfer of funds from the government. As such, this amount represents a subsidy that allows the firm to operate at a much lower cost than competitors. And I would guess that a similarly large number is involved in terms of Medicare and Medicaid healthcare payments for employees who do not receive insurance directly from the firm. Tax breaks to locate stores in particular geographic, economically-deprived regions also no doubt help pad Walmart's bottom-line. There are good arguments on both sides for these payments to exist and continue. What I find funny, though, is the widespread belief that the U.S. economy is a free market. The inefficiencies introduced by the various political biases on both sides of the fence reduce competition and support firms that would otherwise struggle or even fail, preventing the creative destruction that is so fundamental to the effective functioning of the capitalist system.

 

Take care

David

 

David Chandler

Strategic Corporate Social Responsibility: Sustainable Value Creation (4e)

© Sage Publications, 2017

 

Instructor Teaching and Student Study Site: https://study.sagepub.com/chandler4e

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: https://strategiccsr-sage.blogspot.com/

 

 

Wal-Mart Stuck in Probe Limbo

By Joann S. Lublin, Aruna Viswanatha, and Sarah Nassauer

January 28-29, 2017

The Wall Street Journal

Late Edition – Final

B1

http://news.morningstar.com/all/dow-jones/retail/20170128139/wal-mart-stuck-in-probe-limbo-wsj.aspx

 

Strategic CSR - GAAP

The article in the url below reveals the extent to which large U.S. firms are now manipulating their quarterly results by presenting adjusted (i.e., non-GAAP) earnings in addition to their standard accounting results:

 

"Just 29 companies in the S&P 500 index—or 5.7% of the total—closed their books for 2015 exclusively using U.S. Generally Accepted Accounting Principles, or GAAP. That's a sharp decline from 25% in 2006, according to research firm Audit Analytics."

 

The reasons why firms do this do not seem to be in doubt:

 

"The purists are dwindling as companies struggle to increase their earnings in the wake of the 2008 financial crisis, analysts and accountants say. … The adjusted, or customized, figures many finance chiefs use to supplement their company's standard financial reports inflate income by an average of 44% at profitable companies, according to new research. … Adjustments can exclude the effects of such factors as currency swings, noncash charges like restructuring costs and one-time charges. That can help mask the impact of tepid global economic growth, which has left many businesses unable to raise prices and hindered sales growth."

 

As one accountant quoted in the article succinctly puts it:

 

"If everything is rosy and GAAP looks great, there is no need to include a non-GAAP metric."

 

The graphic accompanying the article demonstrates the speed with which firms have adopted this practice:

 

https://si.wsj.net/public/resources/images/BT-AJ548_CFO_16U_20160627184204.jpg

 

The interesting thing about this story, however, is not that this is happening so much as that investors are letting firms get away with it. In other words, although the information on the number of firms employing this practice is freely available, investors either do not know or do not care. Clearly, executives do not feel there is a penalty to be paid if they continue this practice. But, it seems reasonable to conclude that, the longer they are allowed to get away with it, the more they will push the boundaries of what is considered 'acceptable':

 

"U.S. companies are allowed to report non-GAAP metrics so long as they are labeled, justified and reconciled with comparable standard accounting figures, but there is little oversight of how these adjusted figures are calculated."

 

Ultimately, where is the line between presenting a more 'realistic' version of the firm's operations and outright lying about performance? Given the jump in use in recent years, this is something that is of concern to regulators:

 

"SEC Chairman Mary Jo White has warned against giving adjusted earnings more prominence than standard numbers, because it might mislead investors. In May, the agency issued new guidance on using and publicizing non-GAAP measures and signaled it may issue new rules to curtail the practice."

 

What might provide a bit more of an incentive for executives to curtail this practice is if SEC queries to specific firms about questionable practices are immediately made available to investors, rather than delayed as at present. Until there is some meaningful pushback from stakeholders, behavior is unlikely to change.

 

Take care

David

 

David Chandler

Strategic Corporate Social Responsibility: Sustainable Value Creation (4e)

© Sage Publications, 2017

 

Instructor Teaching and Student Study Site: https://study.sagepub.com/chandler4e

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: https://strategiccsr-sage.blogspot.com/


Accounting Blurs Profit Picture

By Tatyana Shumsky and Theo Francis

June 28, 2016

The Wall Street Journal

Late Edition – Final

B1

http://www.wsj.com/articles/accounting-choices-blur-profit-picture-1467086625