End quarterly earnings guidance: business group - Mar. 12, 2007

The U.S. Chamber of Commerce called Monday for an end to quarterly earnings guidance by companies, a shake-up at the Securities and Exchange Commission, optional federal charters for insurers, protections for auditors, and retirement savings initiatives.In a laundry list of business community goals, some old and some new, a commission formed by the chamber - the nation’s largest lobbying group for business interests - said the changes were needed because U.S. markets face new challenges.

We have mixed feelings about the whole quarterly guidance game. It does reinforce short-termism, but shareholders are the company owners and presumably are entitled to know what management expects. The problem is when expectations and reality get out of whack, and the disclosures start doing more harm than good. However, we believe this situation is rare and the presumption should be that more disclosure is better until proven otherwise.

As a general rule, we would prefer hard data to management’s (or anyone else’s) expectations. Monthly sales reports, retail product sell-through and other resources offer a better glimpse into what is really happening and would seem less subject to manipulation. We would gladly exchange quarterly EPS guidance for more frequent updates of useful hard data.

We noted recently that Small Cap Watch List (Track at Marketocracy) and Mid Cap Watch List (Track at Marketocracy) member Tempur-Pedic (TPX) is on a tear lately. Of course, with that kind of performance the management deserves a raise, and should shout about it rather than try to sneak it into a Friday afternoon (1 day after the agreement) SEC Filing.

On February 8, 2006, the Board of Directors of Tempur-Pedic International Inc. (the “Company”) approved annual salary increases for certain named executive officers of the Company (as defined in Regulation S-K, Item 402(a)(3)) other than the Company’s President and Chief Executive Officer. The Board of Directors also approved the payment of the 2006 bonuses for the executive officers pursuant to the bonus plan in place for 2006.

If they keep up the good work, shareholders will likely pay management every dime they deserve.

When you own your own business you can make sure that any managers working for you are acting in your interest. It is different for public companies, where management is not directly answerable to shareholders. In corporate governance terms, this is called the agency problem. How can a shareholder be sure management, who acts as the shareholder’s agent, is acting in the shareholder’s interest? In theory this is done through the Board of Directors.

For the board to be an effective guardian of shareholder interests, it should strive to mitigate conflicts of interest between stakeholders, and in particular between management and shareholders. Managers left to pursue their own agendas unchecked can grant themselves excessive pay, use shareholder funds wastefully, engage in nepotism and do many other things that could potentially be harmful to the shareholders. More »

When you are mired in scandal and have senior executives fleeing left and right, it is important to set a firm tone by making sure your new ethics director is the best possible candidate for the position. After conducting what was clearly an exhaustive search, Hewlett Packard (HPQ - Annual Report) decided that the best possible candidate was someone who has known the CEO for years. Per Bloomberg.com:

Hewlett-Packard Co. Chief Executive Officer Mark Hurd, working to repair the personal-computer maker’s image after a scandal over boardroom leaks, turned to his former company to find an ethics director.Jon Hoak, general counsel for NCR Corp. from 1993 until May 2006, took over as chief ethics and compliance officer yesterday, Hewlett-Packard said today in a statement. Hurd was CEO of NCR before joining Hewlett-Packard in 2005.

It is quite possible that Hoak was hired because Hurd knows from experience how truly tough he is on ethical issues. It is also quite possible that Hoak was hired for exactly the opposite reason. What is without question, though, is that the resignation of several top executives and outside board members has given Hurd the opportunity to stack the board and management ranks with cronies.  Regardless of the qualifications of any particular member, that creates the appearance of potential conflicts at just the time Hewlett does not need them.

Sarbanes Oxley was meant to get companies away from selectively disclosing their performance to influential investors. One way around the problem would be to replace forecasts with more timely delivery of useful data. Retailers have done so for years with their monthly release of same store sales. By choosing today to discontinue that practice, we believe Home Depot (HD - Annual Report) is setting a bad example for other companies. More »