Merryn's Blog

Good companies need to talk to us less

Constantly 'guiding' market expectations may be doing companies more harm than good.

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.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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.

Advertisement
Advertisement - Article continues below

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.

Advertisement

Recommended

Visit/517688/the-british-equity-market-is-shrinking
Stock markets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Visit/511212/reasons-for-investors-to-be-bearish-but-stick-with-the-stockmarket-bulls
Stock markets

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019
Visit/510684/good-news-on-jobs-scares-stockmarkets
Economy

Good news on jobs scares US stockmarkets

June brought the best monthly US jobs growth of the year, but stockmarkets were not best pleased.
11 Jul 2019
Visit/510135/trade-war-ceasefire-boosts-stockmarkets
Economy

Trade-war ceasefire boosts stockmarkets

Stockmarkets sighed with relief after the G20 summit in Japan brought a handshake between Donald Trump and Xi Jinping.
4 Jul 2019

Most Popular

Visit/investments/commodities/silver-other-precious-metals/600812/buy-silver
Silver and other precious metals

You should all own some silver. Just don’t expect it to make you rich

Silver is cool, beautiful and immensely useful. But for investors it's the most frustrating of metals. Dominic Frisby explains why you should own some…
12 Feb 2020
Visit/economy/600802/money-minute-wednesday-12-february-grim-times-for-european-industry
Economy

Money Minute Wednesday 12 February: grim times for European industry

Today's Money Minute previews industrial production in the eurozone, plus the latest from America's central bank.
12 Feb 2020
Visit/investments/investment-strategy/600804/the-secret-to-avoiding-being-panicked-out-of-your-portfolio
Investment strategy

The secret to avoiding being panicked out of your portfolio

With the coronavirus continuing to occupy headlines, investors still aren’t sure how to react. But the one thing you mustn’t do is panic. Tim Price ex…
11 Feb 2020
Visit/investments/commodities/600729/the-rare-earth-metal-that-wont-be-a-secret-for-long
Sponsored

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020