A corporate decision by soft-drink giant Coca-Cola Co. deserves the enthusiastic welcome of publicly traded oil and gas companies in the US.
At a Dec. 13 meeting with investors and analysts, Coke Chairman and Chief Executive Officer Douglas N. Daft announced the company no longer will publish forecasts of quarterly and annual earnings. The aim: to shift investor focus toward strategy and long-term results.
What a concept. Oil and gas companies should hope it catches on.
Focus on strategy
Coke's policy change applies to what analysts call guidance—the information companies provide investors between formal quarterly and annual financial reports. Daft said Coke's board discussed the change for a year before deciding to make it.
"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," he told analysts at the Dec. 13 meeting.
Coke is jousting with convention here. At present, guidance from publicly traded companies provides the raw material for analysts' performance expectations, deviations from which can cause share prices to move—sometimes, from the company perspective, disastrously. The problem isn't disclosure itself; it's the frequency with which company market valuation gets calibrated to expectation. Current practice orients management to short-term business results.
Daft thinks that's bad for shareholders. "We should not run our business based on short-term 'expectations,'" he said. "We are managing this business for the long term."
The other side of the argument says frequent assessment of company performance imposes necessary discipline. It keeps investors alert to projects that managers consider strategic but that show little hope for becoming profitable.
Both views have merit. But there can be little doubt that short-term results have become a fixation of modern business. The complaint is common that the need to respond so frequently and so thoroughly to market disappointment forces managements into a short-sightedness that does investors no service.
In the oil and gas industry, the combination is deadly: truncated vision and pressure to correct course every time the market expresses disappointment. Oil and gas projects have lives measured in decades. And revenue depends greatly on oil and gas prices, which managers can't control and no one can predict. Fluctuation is inevitable.
Good managers base investment decisions on revenue averages. Savvy investors expect and account for price cycles. Yet current market evaluation, by demanding adjustment to every shortfall against expectation, obscures nearly everything beyond the end of the current 3-month reporting period. As a result, an industry that knows better than to react to every price extreme finds itself swinging between euphoria and despair anyway. And managers with compensation linked to stock-price performance make decisions sensible only in the context of the next quarterly income statement. A market that demands profitable growth thus short-circuits efforts to grow profitably.
A dreadful by-product of this perversity is yo-yoing of labor levels. Immediately accountable to the market for revenue frustration related to price, managers naturally turn to the profit factor they can control: cost. For an already lean industry, that ultimately means payroll. Employment by the oil and gas industry now rises and falls with oil and gas prices. For technical professionals the industry needs, work in oil and gas holds diminishing appeal.
Impaired decision-making and destabilized professional development can't be good for oil-company shareholders. But they're consequences of a system of reporting and response tuned too hard to immediate results. When the process of assessment comes so strongly to influence the subject under study, and when the influence hurts interests the assessment is supposed to serve, something needs to change.
Essential conversation
For company disclosures, change should occur in the form of disclosure, not the volume. The integrity of markets depends on information. Investors must know what's happening in companies. The essential conversation between companies and the market is just too formalized, too centered on the drama of needlessly frequent judgment of performance against communal expectation.
"We are quite comfortable measuring our progress as we achieve it instead of focusing on the establishment and attainment of public forecasts," Daft said. If companies thoroughly report and explain their achievements—and their failures—as they occur, investors should be comfortable, too.
