An influential coalition of U.S. chief executives, business groups and labor unions called on June 18 for corporate America to stop providing quarterly earnings guidance to Wall Street. The coalition said its call to abolish quarterly earnings guidance, which is often used by investors to buy or sell a company's stock, was in part prompted by the trading actions of hedge funds.
"The signing of the Aspen Principles by such a diverse group is a milestone in business history," said Anne Mulcahy, chairman and CEO of Xerox Corporation and chair of the Business Roundtable corporate governance task force. The initiative, dubbed "The Aspen Principles," was also backed by PepsiCo, Inc., Pfizer, Inc., and Office Depot among others.
Most publicly traded American companies offer quarterly earnings guidance to stock analysts ahead of releasing their quarterly earnings reports. The guidance gives a likely snapshot on a corporation's finances. Executives say many analysts and investors demand such updates on corporate health, but backers of the Aspen Principles say the focus on the short-term forces companies to avoid critical long-term investments needed to sustain their future vitality.
Companies that miss hitting their guided earnings are often punished by Wall Street, investors and large hedge funds who make big trades on the difference between a company's actual profits and what it forecast.
Although the call to scrap quarterly guidance is backed by big-hitting corporate titans, it remains to be seen how successful the voluntary call to action will be. The effort has also won the endorsement of the Business Roundtable, the AFL-CIO labor union, the Council of Institutional Investors and the New York State Common Retirement Fund. Accounting firms, including Ernst & Young and Deloitte & Touche, as well as former Securities and Exchange Commission chairman William Donaldson also contributed to the two-year discussions that produced the Aspen Principles.
The coalition also called for reform of executive pay practices, including a recommendation that would require senior executives to hold stock they are given for at least some period beyond their tenure with a company. This would tie "them to the long-term growth of the company," the principles stated.
The drive also called for companies to staff their compensation committees with fully independent directors as well as calling for more transparent disclosure of all benefits awarded to top executives. The focus on executive pay comes amid revelations in January that the former CEO of Home Depot, Bob Nardelli, departed the firm with a $210 million severance package despite the company's flagging share price. Public concern about executive compensation was also stoked early last year after the former CEO of ExxonMobil, Lee Raymond, reportedly gained a retirement package of over $400 million.
The principles were in part spearheaded by The Aspen Institute, a nonprofit focused on "enlightened leadership and open-minded dialogue."
Copyright Agence France-Presse, 2007
