We’ve written a lot about how wrong-headed incentive payments to corporate executives, alongside short-termism from the market’s big investors, have damaged Western economies. When everyone’s making money out of short-term share price moves, no-one is paying attention to the long-term investments that companies need to make to create sustainable growth.
All sorts of solutions have been suggested. We agree with Andrew Smithers that a starting point is to change the way CEOs are incentivised. And we have some sympathy with the idea that investors should be rewarded in some way for holding shares for the long term.
We like the idea, for example, of tiered dividends – the longer you hold, the higher a pay out you get (although we have no idea how that would work legally). But here’s another simple idea from the The Generation Foundation (a group dedicated to “sustainable capitalism”).
It suggests doing away with the ridiculous business of companies constantly offering “earnings guidance” to the market. Constantly guiding expectations “implicitly highlights near-term performance”, and distracts attention from long-term prospects.
It allows CEOs, with their own compensation in mind, to “engage in questionable practices” to move the share price around at times that suit them. It prevents analysts from thinking for themselves and properly analysing the company in question. And finally, it commits management to short-term targets “at the expense of reduced flexibility in their business strategy”.
Look at it like that and you might begin to think that life would be better if listed companies actually offered the markets rather less in the way of information.
It has long been thought that good companies providing regular earnings guidance reflects good corporate governance. But perhaps it just provides cover, and an excuse for what is effectively bad corporate governance. In which case, it is time good companies gave it up.