NEW YORK, June 27 (Reuters) - Corporate boards are spending too much time giving short-term forecasts to Wall Street and directors should instead focus on long-term strategic goals, a group of influential business leaders urged on Wednesday.
Led by former U.S. Securities and Exchange Commission Chairman William Donaldson, the Committee for Economic Development said directors should not make short-term decisions at the expense of long-term ones.
“We know from experience that long-term goals have been sacrificed on occasion to short-term considerations,” the CED wrote in its report. “Sometimes those considerations cause suboptimal economic choices and lamentable underperformance.”
Citing changes in technology and regulations, the growth of private equity and hedge funds, executive compensation linked to short-term performance and shorter tenures for chief executives, the group said directors have grown to be too focused on the short term.
“Quarterly guidance is at best a waste of resources and, more likely a self-fulfilling exercise that attracts short-term traders,” the CED wrote, citing various research studies.
Instead, the group argued corporate directors should support long-term strategic goals, including succession planning, tie executive compensation to longer-term goals and become more transparent about meaningful indicators of long-term corporate value.
The CED joins several influential groups, including The Aspen Institute, the U.S. Chamber of Commerce, the CFA Centre for Financial Market Integrity, Conference Board and Business Roundtable, that have called for an end to quarterly guidance.
But the CED differed by focusing on the role of directors in the process and stressing that companies try to find the proper balance between short- and long-term goals.
“Directors are uniquely positioned to make a critical impact,” Donaldson said at a panel discussion of the paper in New York.
Critics of the idea to stop providing guidance worry that companies would simply use it as an excuse to become less transparent. Investors often use guidance as a tool for managing how effective a company’s managers are at achieving their goals.
But others on the CED’s panel argued that companies could do even small things, such as providing a forecast range instead of a specific down-to-the-penny number, to alleviate some of the pressure caused by the focus on the short term.
“It’s not so much the guidance itself, it’s the pressure to make the numbers,” said Patrick Gross, chairman of The Lovell Group who serves as a director on five corporate boards. “I think ranges would be helpful. It’s not about all or nothing.”