August 20, 2007

Earnings Guidance: Beginning to Take the Long View?

Broc recently blogged about efforts to move away from the quarterly earnings guidance grind, including the desire by many CFOs to see the practice of quarterly earnings guidance go the way of the dinosaur. A recent NIRI survey suggests that while there are some encouraging developments on the earning guidance front, radical change in this practice is certainly not going to happen overnight.

Of the companies responding to the NIRI survey, 34% indicated that they had discontinued guidance within the past 5 years. Those who discontinued guidance reported a relatively indifferent reaction from the investor community (62% reported indifference from the sell side while 47% reported indifference from the buy side), along with a generally positive reaction from senior management (88% reported a positive management reaction). For those survey respondents discontinuing guidance, most reported either a neutral impact on the company’s stock valuation (45%), or no opinion about the impact on stock valuation (42%).

Among those companies that continue to provide guidance, the vast majority reported providing guidance on earnings per share and revenue. Of the survey respondents providing guidance, 82% cited the need to ensure sell-side consensus and that market expectations are reasonable as the reasons for continuing to provide guidance on quantifiable financial measurements. Only 27% of the companies reported providing guidance for quarterly estimates, with 58% reporting that they provide annual estimates. 82% of the companies providing guidance indicate that they were not considering changing the frequency with which they provide that guidance. Unfortunately for all of those CFOs out there who would like to see an end to earnings guidance, a surprising 90% of the survey respondents indicated that their company was not considering any change to the policy of providing earnings guidance.

We will continue to update our “Earnings Releases” Practice Area with information on the latest earnings guidance developments.

Options Backdating: Former Brocade CFO Charged With Turning a Blind Eye to Misconduct

On Friday, the SEC announced charges against the former CFO and COO of Brocade Communications Systems for his involvement in the company’s options backdating efforts. These charges come shortly after the criminal conviction of former Brocade CEO Gregory Reyes, which Broc blogged about earlier this month.

According to the SEC’s complaint, Michael J. Byrd was allegedly involved in the backdating practices in his role as CFO and later as COO of Brocade. The allegations point out Byrd’s involvement with backdated grants to new employees through the company’s so-called “part-time” program, where, in order to establish a tortured basis for meeting an accounting interpretation of the definition of an “employee,” new hires were to be paid for “four hours a week until they start.” It is alleged that option grants were made through offer letters dated well in advance of the actual hiring decision, along with directives to treat the employees as part-time from the date the options were granted. Byrd is also alleged to have been involved with interviewing and hiring candidates – thus fully aware of the timing of these events – while at the same time signing minutes of purported Committee meetings designating earlier (and advantageous) hiring dates. The complaint alleges that Byrd received one backdated grant, and he is charged with filing a false Form 5 reporting that grant.

As noted in this article, Byrd was originally expected to testify at the criminal trial for Reyes, but for unknown reasons the prosecution never called him as a witness. The article states: “In a follow-up interview with, Potter [Byrd’s attorney] said he did not know why Byrd was never called, but said his client had cooperated fully with both the SEC and the DoJ as a witness, and that at no point in the investigation had his client assumed status as a target of federal prosecutors. ‘He never entered into a cooperation agreement,’ Potter told ‘He volunteered his cooperation as a witness.’”

Interestingly, despite Linda Chatman Thomsen’s statement in the press release that “[t]his case confirms the Commission’s commitment to pursuing not just those who perpetrate financial fraud, but the corporate gatekeepers who allow it to happen on their watch,” no officer and director bar is sought for Byrd. The SEC is seeking only disgorgement and civil money penalties in this particular case, raising the question: “what does it take to get an O&D bar these days?”

Hewlett-Packard Sued by CNET Reporters over Spying Fiasco

Nearly a year has gone by since the details of Hewlett-Packard’s investigation into a boardroom leak began to surface, and there is no doubt that at this point H-P would like to move on from this scandal. Now, as reported last week in this CNET article, three reporters at CNET and members of two of the reporters’ families have decided to sue H-P in California state court. The plaintiffs seek unspecified damages for invasion of privacy, intentional infliction of emotional distress and violations of a state law prohibition against “unfair, fraudulent and deceptive practices.” Former H-P board of directors chair Patricia Dunn and former H-P attorney Kevin Hunsaker are also named as defendants in the lawsuit suit.

Prior to this lawsuit, justice had been relatively swift for H-P. The company had settled civil charges with California’s Attorney General, and also settled SEC disclosure charges earlier this year. Criminal charges against Dunn, Hunsaker and two others were dismissed. The practice of “pretexting” was also addressed in a surprisingly quick manner by Congress with the enactment of the Telephone Records and Privacy Protection Act of 2006, which was signed into law by the President back in January of this year.

– Dave Lynn