What Wall St. hates to hear: top executives downplay earnings guidance—some have kicked the habit altogether—and may force the market to go cold turkey with them - Cover Story - Statistical Data Included

Chief Executive, The, April, 2002 by Gregory J. Millman

What's more, when Engen does offer guidance, it comes with a strong proviso: The estimates depend on stable raw material prices, and aluminum prices are notoriously unstable. "Alcan's short- and medium-term earnings are greatly affected by the price of aluminum as traded on the London Metal Exchange. By giving an earnings outlook we make it possible for others to use their views of metal prices and other major factors to develop their own projections of our results," Engen explains. He also emphasizes that the most important long-term measure is not earnings, but what he calls "economic profit, returns in excess of the cost of capital." The CEO says that some on Wall Street have applauded his approach.

Compensation based on return on invested capital

Yost of ArvinMeritor has gone so far as to set up a compensation system based on the return on invested capital. The $6.8 billion auto parts manufacturer runs an annual bonus program and a three-year rolling bonus program. For the annual one there are two metrics -increasing earnings per share and improvement in non-cash working capital. Those two fit into return on invested capital and economic profit. But economic profit and return on invested capital can only change modestly in any given year. For the three-year rolling program the metrics are EPS growth and cash flow return on investment. Yost believes those two will, over a longer term, improve return on invested capital and economic profit.

At this point, it's hard to tell just how many CEOs will dispense with the time-honored ritual of EPS guidance. Recent SEC regulations on fair disclosure--which require material information to be immediately released to the entire market -- have added momentum, because they restrict companies from making significant information available to a favored few. And it's hard to argue against Kilts, Diller, Landuyt, Engen and others who have decided to let the future speak for itself. In the post-Enron climate, anything that removes one more fishy number from the market can only be an improvement.

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