The Wrong Thing at Coke
By Amey Stone
Coca-Cola's recent decision to stop issuing earnings guidance has an admirable goal. The soft-drink giant says it wants to prompt investors to take a long-term strategic view. Indeed, few would doubt that the investing public, as well as all of Corporate America, could use a healthy dose of long-term perspective about now.
If Coke thinks restricting the flow of info is a means toward achieving that end, however, the company has it all wrong. Coca-Cola (KO ) Chief Executive Douglas Daft explained in a Dec. 13 news release: "We believe that establishing short-term guidance prevents a more meaningful focus on the strategic initiatives that a company is taking to build its business and succeed over the long-run."
Not necessarily. It can be argued just as well that a lack of detailed information leads to the kind of investor anxiety that prompts a sell-first-ask-questions-later attitude. What investors crave from companies now is more information -- the honest, straightforward kind -- not less.
The risk here is that if an outfit as well established as Coke can get away with revealing less about its finances, then lots of others can jump on the bandwagon, too. Academic studies have already shown that issuing quarterly guidance tends to reduce volatility in stock prices, not increase it, mainly because it softens the blow if a quarter is going off track. "I think it's going to be interesting to see how much more volatility Coke is going to experience," says Louis Thompson, president of the National Investor Relations Institute, a trade group.
Since it's such a large, well-followed company, Coke may well dodge this bullet (in fact its stock has barely budged since the announcement). But for most companies, a decision not to provide guidance would have an adverse impact on a stock price, since it reduces visibility, say analysts and investor-relations professionals (see BW Online, 12/17/02, "Where Coke Leaves a Bad Taste"). "I certainly hope this is not a trend for the small, underfollowed companies," says Brooke Wagner, a senior director with New York investor-relations consultant Citigate Financial Intelligence. "For them, the investor backlash would be severe."
The fundamental flaw in Coke's logic is ignoring the fact that the primary problem in Corporate America is not with investors' short-term focus on quarterly results, but with management's desire to achieve short-term goals because of their impact on executive compensation. "With the obsessive focus on quarterly numbers, management is motivated to make decisions that are pragmatic from a short-term perspective but may impair the long-term health of the organization," says Jeffrey Evans, president of the New York Society of Security Analysts.
Changing management's financial incentives would accomplish reform a lot faster. Especially since, in the two-and-a-half-year bear market, investors who have kept their fingers on the trigger have typically done much better than the buy-and-hold crowd. Selling on the first whiff of bad news will be a tough habit to break until the bull market returns in force. If a main objective of corporate reform is getting investors to trust management and own stocks for the long-term, providing more disclosure rather than less would be a better step.
To its credit, Coke had already announced that it plans to expense stock options, giving investors a fairer picture of how the company is using equity shares to reward stellar managers. And Coca-Cola claims that it will continue to "provide investors with perspective on its value drivers, its strategic initiatives, and those factors critical to understanding its business and operating environment." As long as it gives Wall Street enough information, that will be a good thing, says Chuck Hill, head of research at earnings tracker First Call.
Hill applauds Intel (INTC ), for example, which doesn't give actual earnings guidance but provides quarterly and mid-quarter updates that give ample information for analysts to devise their own estimates. "As usual, the devil is in the details," says Hill, who is deferring judgment on Coke's decision until he sees what information it provides next quarter.
THE HAND OF WARREN.
You can see the clear stamp of Warren Buffett, a Coca-Cola board member, on this decision. Buffett, an advocate for long-term investing, is famously stingy with doling out information on his Berkshire Hathaway (BRK.A ) holding company. He also sits on the board of Gillette (G ), which stopped issuing earnings forecasts in 2001. It seems unlikely that Coke's decision not to issue quarterly guidance will result in more and better information being distributed about the company.
And if it fails in that regard, Coke's new policy seems unlikely to encourage investors to take a long-term focus. In fact, given the current environment of fear and mistrust of corporate management, it may do just the reverse. Coke's move also sends the wrong message to its corporate peers and to Wall Street about what's acceptable as investors struggle to regain confidence in Corporate America.
Stone is Associate Editor for BusinessWeek Online in New York
Edited by Beth Belton