• Program 2006-07

Quarterly Earnings Treadmill: Barrier to Sustainability or Keeping it Real?


January 08, 2007


Smith-Barney or NYAS, NYC

America has long been criticized as a country in need of instant gratification; the same could be said for some shareholders. CEOs are beholden to Wall St and analysts' expectations regarding the magical 'quarterly earnings' results ('Real men make their numbers'), but how can the game be changed so that management can make long-term plays and still deliver meaningful quarterly and annual results in a market that is dominated by hedge funds, day traders, and speculation? Betsy Morris of Fortune magazine recently challenged Jack Welch's old rules of management with a new set:

New Rules Old Rules
1. Agile is best, being big can bite you Big dogs own the street
2. Find a niche, create something new Be No. 1 or No. 2 in your market
3. The customer is king Shareholders rule
4. Look out, not in Be lean and mean
5. Hire passionate people Rank your players, go with the A's
6. Admire my soul Admire my might

What has pushed management to re-examine Welch's rules that have (in the quarterly earnings respect) been successful? Are these the best "new rules"? What are the risks associated with these new rules? Which corporations may be using the old rules but seeking to reform? Welch still argues that his rules are sustainable in the long term. Is that an accurate statement? Do American corporations need to change the rules- that is sacrifice some immediate benefits for longer term investments?


Bruce Kahn, Smith Barney, bruce.m.kahn(at)smithbarney.com


Jeffrey MacDonagh, Domini Social Investments, Marc Brammer, Innovest Strategic Value Advisors, John L. Manley, Jr., CFA, Managing Director, Citigroup Investment Research