Rob Swystun, Pristine Advisers
The decision of whether or not to provide guidance to the market about future operating results is something every company has to deal with when going public. There is no standardized approach to giving guidance, but it’s safe to say that every company that does give guidance should have a carefully thought out policy governing how it’s done.
Here are 10 guidance guidelines created by Joel Trotter and Steven Stokdyk, partners with law firm Latham & Watkins LLP, and associate Nathan Ajiashvili that originally appeared in Financial Executive magazine.
1. Designate a Limited Number of Company Personnel to Handle Communication
Guidance should be given in a controlled environment. To facilitate this controlled environment, companies should authorize a select group to communicate their future plans and prospects with analysts and investors.
2. Adopt and Follow an Appropriate Guidance Policy
Part of following that policy is having a set time of year for when guidance is released so investors know when to expect it and also to refrain from releasing guidance outside of this set time except for extraordinary circumstances like a securities offering or a material acquisition.
If investors have questions pertaining to guidance between scheduled updates, a company can deflect these questions by pointing to its policy of not giving updates outside of these scheduled ones.
3. Do Not Reuse Boilerplate Disclaimers
While recycling is usually a good thing, that does not pertain to disclaimers. They should always be prepared anew and temper any positive predictions with an open and honest look at what could go wrong to prevent the company from realizing its positive predictions.
Those predictions should also be clearly explained, including the reasoning behind the predictions. The material assumptions that predictions are based on should be disclosed and the risk factors tied to the achievement of those assumptions.
As an example, Trotter, Stokdyk and Ajiashvili point out that a 10% increase in earnings that is premised on cutting redundant overhead costs is not the same as a 10% increase that is premised on a substantial increase in market share and you should make it known which one you’re using to base your predictions on.
At its most basic, precautionary language is meant to protect you from liability should predictions not perform accordingly.
4. Have Prepared Remarks Reviewed by Counsel and Follow the Script
If you are providing guidance during the earnings call with no written record of it forthcoming (as some companies are wont to do), make sure you stick to the prepared script. For chief financial officers who have a tendency to stray from a script, a written statement given out with the earnings release may be wise.
Regardless of how you do it, have it reviewed by legal counsel first.
5. Remember Regulation FD
In between earnings calls, you will likely have private meetings with analysts who may want clarification on something discussed in an earnings call. Answering questions between earnings calls in one-on-one meetings on subjects that were discussed in the earnings calls are generally acceptable providing nothing new is disclosed.
Venturing into territory that was not covered in the earnings call should be avoided by saying it’s not company policy to comment on guidance between earnings calls. Even confirming prior guidance can land you in hot water, so it’s best to stick to your policy and not comment.
6. ‘No Comment’ is a Legitimate Comment
Work out in advance which questions you are prepared to answer and which questions will get the “no comment” treatment. Keep in mind that a public company is not required to immediately make public all material facts on a real-time basis, but if you’ve made a comment on something already and new facts come to light that make that prior statement false, a follow-up clarifying statement is preferable to not commenting at all.
Okay, that’s confusing and definitely merits an example.
Again, from Trotter, Stokdyk and Ajiashvili:
“A public company can answer the question ‘Are you in merger negotiations with XYZ Inc.?’ with a ‘no comment’ response and not be obligated to later update that statement if it enters into merger negotiations.
“However, if the answer to the first question was ‘This company will never enter into merger negotiations with XYZ Inc.,’ then the company may want to consider an updating disclosure if merger negotiations begin in earnest.”
7. Do Not Comment on or Redistribute Analysts’ Reports
If an analyst makes too lofty or too low of predictions and you want to comment on them to temper them, you should do so in a press release or during the earnings call so that the information is disseminated to everyone at the same time.
However, not entering into the arena of public disavowals of rogue analysts’ estimates at all is also a good option.
8. Remember Regulation G (Non-GAAP Financial Measures)
Public release of non-GAAP (generally accepted accounting principles) financial measures need to comply with the SEC’s Regulation G. This regulation requires companies disclosing non-GAAP financial measures to also provide a presentation of the most directly comparable GAAP financial measure and a reconciliation of the disclosed non-GAAP financial measures to the most directly comparable GAAP financial measure for forward-looking financial measures to the extent available without unreasonable efforts.
9 . Evaluate Whether You Should Give an Update
If you know you are going to miss predictions disclosed in the guidance you’ve issued, evaluate the situation to determine if you should offer an updated guidance statement. Start with what was said in the initial disclosure and then consider whether it’s obvious from events that have happened since then that the guidance has become unreliable (such as an acquisition or major industry development).
Exceeding earnings previously disclosed in guidance by a modest amount is generally not problematic and should not require an updated statement, but if a company is sure that it will miss the mark substantially — either above or below — an updated statement may be required.
The goal should always be to maintain credibility, provide transparency and avoid unpleasant surprises.
10. Keep Rules 1 Through 9 in Mind When Dealing With Intervening Events
Although a policy is important to have, a company should not just follow it blindly. Intervening events will happen throughout a company’s lifespan between quarterly earnings calls and releases and decisions will have to be made whether to update guidance or not, particularly for events like an offering of securities, share repurchase program or acquisition or when insiders are buying or selling company securities.
When these events pop up, a company should revisit the first nine rules here to determine whether updates need to be given. These events can happen quickly and in this era of instant communication, a decision has to also be forthcoming quickly.
When giving guidance, all the major players need to be able to coordinate and communicate efficiently so informed decisions can be made about what to say to the market and when to say it.