Davis Polk & Wardwell Client Memorandum

To Guide or Not to Guide: Communicating with Investors in Uncertain Times

October 20, 2008

The current market turmoil is causing a number of our clients to revisit their practices with respect to giving “guidance,” which for this purpose means communicating, in a press release or investor conference call, specific numbers or ranges for expected revenues, earnings per share and other key financial metrics.  Some companies are saying that conditions are so uncertain that they are loath to give even quarterly, much less annual, guidance.  Others are wondering whether the financial crisis provides a graceful basis to dispense with a practice that is of questionable value and that often consumes disproportionate attention at the expense of more strategic matters.  This note will discuss some considerations to keep in mind if you are having that discussion.

Guidance practices differ widely.  In a 2008 survey by the National Investor Relations Institute, 36% of respondents indicated that they do not provide financial guidance, and the remaining respondents revealed a variety of practices as to when and how they guide investors.  We think that broad surveys of this sort are not especially illuminating, and that each company will need to consider its own situation and that of its peer companies.  But whichever approach you choose, you are likely to be in good company.

Companies considering reducing the amount of financial guidance they provide, or even suspending it altogether, should keep the following points in mind:

  • Guidance and subsequent events. Macroeconomic uncertainty increases the risk that prior financial guidance, however well considered when given, will be overtaken by events.  The 1995 Securities Reform Act created a safe harbor for “forward-looking statements,” and most companies that provide financial guidance have good practices for identifying statements as forward-looking, referring to appropriate risk disclosures, disclaiming a “duty to update,” and not later reaffirming the guidance.  The incidence and success rate of private litigation with respect to “missed quarters” are sharply down.

    Even so, companies face a difficult decision if it becomes clear that previous guidance is now materially off target.  The decision to revise guidance or to preannounce results is in our experience more often driven by reputational concerns and relationships with investors and analysts than by purely “legal” concerns.  Remember, though, that litigation on these subjects continues to occur, and the plaintiffs’ bar can be creative in challenging whether guidance was given in good faith or whether subsequent actions amount to reaffirmation of the guidance. Less guidance will generally mean a smaller target for plaintiffs.
  • Reg FD risk profile.  Formal guidance in a press release or public conference call provides a definitive “statement of record” to which spokespersons may refer in subsequent conversations.  In the absence of guidance you should expect an increased level of dialogue with investors and analysts who will be looking for facts or suggestions, or body language, from which to infer management’s expectations.  This puts a premium on training and discipline for all spokespersons up to and including the CEO.  Spokespersons should be fully briefed as to what they can and should not say, and should understand that in the case of a mistake they need to alert Legal promptly to enable the company to take advantage of Item 7.01 of Form 8-K.
  • Risks and benefits of expanding the consensus range.  Companies that stop giving guidance should expect that sell-side analysts, left to their own devices, will be less tightly bunched than before.  Many companies view this as a positive feature, as it in effect gives you a larger target to hit.  But it also increases the risk of a true outlier: the analyst who is either proceeding from a different worldview (which is fine) or who has gotten his or her sums wrong.  In the latter case there will be a strong temptation to “correct” the analyst’s mistake, which again raises the spectre of a Reg FD problem.
  • Choosing when to stop.  The best time to limit or to stop giving guidance, of course, is when you have just hit your number.  Suspending guidance after your third consecutive miss, by contrast, smells more of despair than of a change in philosophy, and may reflect negatively on management.  It may still, however, be the right thing to do.
  • Coverage implications. A company’s willingness to provide guidance may at the margin affect a sell-side analyst’s decision to begin or continue coverage.  For highly visible, large-cap companies this will generally not be a factor, but it could be an important consideration for smaller companies seeking to hang on to or expand coverage.

Please direct questions or comments to your Davis Polk contact.


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