Guidance, good riddance!

February 7, 2009, 1:25 AM UTC

Guidance–the revenue and profit forecasts that companies divvy out to Wall Street analysts–is dying a slow death. Hooray for that!

As a slew of big names–Wal-Mart , Costco , Microsoft and Yahoo , among them–announced in the past two weeks that they would suspend or limit guidance because of economic uncertainty, analysts who follow these companies have reacted skeptically. Not giving 2009 guidance “hardly instills confidence in the business,” Sanford Bernstein analyst Andrew Wood wrote about Unilever yesterday. Indeed, less transparency is often ominous. Since December, when General Electric CEO Jeff Immelt put the nix on quarterly earnings guidance, GE stock has fallen 34%.

But here’s the reality: These companies are doing the right thing. In fact, there’s long been a small cadre of highly respected corporate chiefs who swore off earnings guidance on principle. Jim Kilts, who once ran Kraft and Gillette and sold the latter to Procter & Gamble, wouldn’t provide guidance because, as he once told me, “Companies get in trouble the same way. They drive the organization to make a number rather than do the right thing.” Kilts calls this the “circle of doom.” Now doing private equity at Centerview Partners and on the boards of MetLife, Pfizer, and MeadWestvaco, he called this afernoon to offer his take on today’s no-guidance trend. “Everybody’s getting on the bandwagon,” he said, sounding happy.

One of Kilts’ disciples from his Kraft days, Bob Eckert, is now CEO of Mattel . He delivered disappointing earnings this week, but the forecast that the analysts had was Wall Street’s own, not Eckert’s, because he too refuses to give guidance. Always has. In 2000, when Eckert joined Mattel as chief, he decided, “We were not going to play that game anymore,” as he told me. He got rid of Mattel’s targets of 15% annual earnings growth and 10% revenue growth. He also sent colleagues copies of what he said was “my all-time favorite business article ever”: a 2001 Fortune story titled “The 15% Delusion,” by Carol Loomis, about the dangers of ambitious growth goals.

I called Eckert yesterday. I hadn’t talked to him in years. Our converation was off-the-record, but I’ll tell you, he believes more strongly than ever that providing guidance to Wall Street propels a boss to make bad decisions. Eckert reminded me of another article that explains the danger intelligently: “Temptation is all around us,” a first-person piece by Novartis CEO Dan Vasella that Fortune published in 2002. Here’s an excerpt from Vasella’s first-personer:

The practice by which CEOs offer guidance about their expected quarterly earnings performance, analysts set “targets” based on that guidance, and then companies try to meet those targets within the penny is an old one. But in recent years the practice has become so enshrined in the culture of Wall Street that the men and women running public companies often think of little else. They become preoccupied with short-term “success,” a mindset that can hamper or even destroy long-term performance for shareholders. I call this the tyranny of quarterly earnings…

Tyranny is a slippery thing. Rarely does it make itself known for what it is right from the start. Once you get under the domination of making the quarter–even unwittingly–you start to compromise in the gray areas of your business, that wide swath of terrain between the top and bottom lines. Perhaps you’ll begin to sacrifice things (such as funding a promising research-and-development project, incremental improvements to your products, customer service, employee training, expansion into new markets, and yes, community outreach) that are important and that may be vital for your company over the long term…

And here I would contend that the culprit that drives this cycle isn’t the fear of failure so much as it is for many the craving for success. For the tyranny of quarterly earnings is a tyranny that is imposed from within.

It’s hard to break out of such cycles, as Vasella notes. One of the few good thing about these dire and unpredictable times is that they’re giving CEOs a chance to behave a little better.

P.S. For more on Costco’s troubles and how one mega-store manager is trying to do to beat them, read “Discount retail woes: a quick tour,” on Postcards yesterday.