NEW YORK: At a time when corporate accounting scandals have increased calls for transparency, the Coca-Cola Company announced in mid-December that it was taking a step in the opposite direction.
The Atlanta-based beverage giant told Wall Street that it would cease providing investors with quarterly and annual forecasts about its future profits. The practice of providing the investment community with such forecasts, widely referred to as earnings guidance, is a widespread Wall Street convention.
Because earnings guidance plays an important part in helping investors and analysts formulate expectations for future profits, it has become a critical part of benchmarking a company's financial performance.
Nevertheless, Coke said it was eschewing the practice because it wants to concentrate on its long-term business objectives, and avoid getting bogged down in what many perceive to be the Street's preoccupation with meeting short-term expectations. The company said it would now concentrate on providing investors with more information about its progress toward reaching its longer-term goals.
The media has speculated that legendary investor Warren Buffett, who sits on Coke's board of directors, helped engineer Coke's new policy. Buffett has been critical of the Street's shortsightedness, leading corporations to neglect the long term in favor of meeting the Street's short-term expectations.
In contrast to the positive reception to Coke's July announcement that it would voluntarily switch to an accounting treatment that expenses the stock options it doles out to its employees, the reaction to this latest IR move has been decidedly mixed.
"Is Coke absolutely wrong?" said Thomas Ryan, co-CEO of Westport, CT-based IR shop Integrated Corporate Relations. "No, but it's probably taking it to an extreme. It might have been able to find a happy medium that would have satisfied the investment community and accomplish the goals of not having its management 'play the earnings game.'" Indeed, whereas several other companies quickly followed Coke's lead on expensing options, there were no immediate followers this time around.
Some say that because Coke is an enormous company, it has the luxury of communicating with Wall Street how it chooses.
"Because Coke is such a bellwether on a variety of levels, it can do something like this," said Howard Zar, EVP of IR at Porter Novelli. "There are many other smaller and midsize companies that don't have that opportunity."