Guidance Policy Recommendations

As an investor who focuses on providing capital and strategic assistance for global growth companies, we know that it is critical to have a longer term view when it comes to making strategic decisions in order to build a company with lasting value. It is clear that a focus only on “short-term results by investors, asset management firms, and corporate managers collectively leads to the unintended consequences of destroying long-term value, decreasing market efficiency, reducing investment returns, and impeding efforts to strengthen corporate governance."¹

Therefore, we are providing the following summary related to developing the appropriate guidance policy for public companies.

Why provide guidance at all?
Most companies provide financial guidance to ensure sell-side consensus and reasonable expectations. There is no question that sell-side analysts and investors always want more information rather than less. Therefore, investment bankers will always advise providing more detailed financial guidance rather than no guidance or annual guidance. It is our view that there is minimal risk to not providing guidance and the most recent NIRI survey in June 2007 supports our view indicating that “a majority of respondents reported that discontinuing guidance had a neutral effect on valuation, volatility, shareholder turnover and short positions."²

If you provide guidance, what kind of guidance is best?
The fundamental rule for managing analyst and investor expectations is to under promise and over deliver. It is more important to have a clear understanding of the dynamics, drivers, assumptions and sensitivities of analysts’ financial models, than it is to provide specific financial estimates for revenues and earnings on a quarterly basis. Make sure you have your own internal model along similar lines (same drivers) as the analysts’ enabling you to see potential errors or misjudgments.

Some business models are more predictable than others and this will facilitate the job of sell-side analysts. For those businesses in which greater variances can occur by quarter, it is even more important to focus on the long-term and explain in general what drives such financial volatility. The goal should be to provide the appropriate qualitative information to demonstrate an understanding of the risks and upside and to build trust over time. If you do provide guidance, our view is that annual guidance within a range for revenue and earnings growth is appropriate with quarterly updates regarding key trends and actions that might affect annual trends.

What other information can be provided to help analyst and investors understand your company and its future prospects?
There are many non-quantifiable performance measurements that are very helpful to analysts/investors including: qualitative statements about market conditions; information related to trends or seasonality; industry specific information; general information about high-level performance measures, etc. An important objective should be to improve communications and transparency. Contact with analysts/investors should be more meaningful and potentially more frequent (underscoring the importance of a strong Investor Relations Officer) as communications about company strategy and long-term value drivers can lessen the financial community’s dependence on earnings guidance. It is really about building trust in the management team so that analysts/investors believe that management can deliver company performance and growth. The foundation for this trust is regular and honest communication.

<sub>1. Breaking the Short Term Cycle, CFA Institute, 2006.
2. NIRI Issues Results of 2007 Earnings Guidance Practices Survey, National Investor Relations Institute, July 17, 2007.</sub>