Warren Buffett: Earnings guidance can lead to corporate malpractice

By Noah Buhayar, Agnel Philip

The practice of telling Wall St what to expect from earnings can distort management's priorities. Photo / Getty Images
The practice of telling Wall St what to expect from earnings can distort management's priorities. Photo / Getty Images

Warren Buffett, who is among business executives pushing for improved corporate governance, said that the practice of telling Wall Street what to expect from quarterly earnings can distort management's priorities.

"Guidance can lead to a lot of malpractice," the billionaire chairman of Berkshire Hathaway Inc said Thursday on CNBC.

"It doesn't have to, but I think if the CEO goes out and says, 'We're going to earn $1.06 next quarter,' I think that if they're going to come in at $1.04, there's a lot of attempts to find a couple extra pennies some places."

A group of the US financial industry's most powerful leaders, including Buffett, BlackRock Inc's Laurence D. Fink and JPMorgan Chase & Co's Jamie Dimon have released a letter and report detailing what they called "commonsense" recommendations for public companies to improve governance and relations with shareholders.

Their suggestions include urging companies to refrain from short-term earnings forecasts, embracing corporate transparency and pushing for independent boards.

"We share the view that constructive dialogue requires finding common ground - a starting point to foster the economic growth that benefits shareholders, employees and the economy as a whole," according to the letter. "To that end, we have worked to find commonsense principles."

Fink, who runs the world's largest asset manager, already encouraged chief executive officers in a letter earlier this year to stop offering earnings guidance and increase their focus on long-term goals.

In the letter on Thursday, the executives said if companies do provide earnings guidance, they should avoid inflated projections, and forecasts should be realistic.

"Our financial markets have become too obsessed with quarterly earnings forecasts," according to the letter. "Companies should not feel obligated to provide earnings guidance -- and should only do so if they believe that providing such guidance is beneficial to shareholders."

Another recommendation urges companies to account for stock-based compensation in their non-GAAP earnings. Group members also said they would prefer companies not have multiple classes of stock, which grants some shareholders more say when voting.

We share the view that constructive dialogue requires finding common ground - a starting point to foster the economic growth that benefits shareholders, employees and the economy as a whole.

Berkshire has dual classes, and Buffett said that arrangement can make sense in some instances. However, he told CNBC that owners of Berkshire B shares, which have lesser voting rights, hold an increasingly large stake in the company as he converts his A shares and donates them to charity.

Other executives that were part of the public letter include heads of General Motors Co, General Electric and Verizon Communications. Money-management firms whose executives participated included Capital Group, Vanguard Group Inc. and T. Rowe Price Group.

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