3.1 Pros and Cons

The question of whether and how to provide investors with forward-looking information and especially with financial projections – moving beyond the strategy – has been the subject of fierce debate for many years.

Counting Warren Buffet, the CFA Institute, and McKinsey among its ranks, one group firmly advocates not practicing financial guidance, primarily because it encourages short-term thinking and action. Opposing this group is the majority of listed companies, which, despite these concerns, communicate financial guidance.

In the US, the Regulation Fair Disclosure (RegFD) of the Securities and Exchange Commission (SEC), published in 2000, gave a powerful boost to the concept of financial guidance. A trend toward increased guidance has also emerged in Switzerland; this is practiced here at home by the majority of companies today, most especially by the larger ones.

Deviations

The regulatory requirements may have played a role in this. The rules on Ad hoc Publicity also include the duty, in line with established practice, to inform investors if the annual or interim results deviate notably from the guidance given or in cases where no guidance has been given significantly from the results achieved in the prior-year period.

But bear in mind: The more precise the guidance, the greater the probability that it will have to be corrected in the course of a profit warning.

More than noise

One argument that critics put forward is that guidance is just «noise». According to this, managers cannot forecast future results better than investors and analysts can and should therefore not get involved in this activity. However, studies have demonstrated the opposite. Managers clearly beat analysts when it comes to how correct and accurate their financial forecasts are, and this skill is also recognized by the financial market (for more on this, see the book by Baruch Levⁱ). The differences in this respect can be large, however, depending on the industry and the company situation. The decision tree below can be helpful in answering the question of whether your company should publish guidance and, if yes, what kind of guidance.

Pro/Con Decision-Making Criteria for Financial Guidance