Giving good guidance.

• Author: Trotter, Joel
• Position: Governance

Every public company must decide whether and to what extent to give the market guidance about future operating results. Questions from the buy side will begin at the initial public offering (WO) road show and will likely continue on every quarterly earnings call and during investor meetings and conferences.

The decision whether to give guidance, and how much guidance to give, is an intensely individual one. There is no one-size-fits-all approach in this area. The only universal truths are: A public company should have a policy on guidance and the policy should be the subject of careful thought.

Here are 10 rules for giving good guidance, as well as some practical suggestions to consider when drafting a guidance policy.

1 Designate a Limited Number of Company Personnel to Communicate

It is best if guidance and the related cautionary disclosures are given in a controlled environment. Every company should carefully evaluate its internal processes for preparing and providing guidance and designate a limited number of company personnel to communicate with analysts and investors about future plans and prospects.

2 Adopt an Appropriate Guidance Policy Early and Follow It

Having a policy and following it can go a long way. Companies should tell investors when guidance will be given so investors know what to expect. For example, a company could tell investors that its policy is to give guidance once a year, with the year-end earnings release, covering expectations for the year in process. A company with that guidance policy should then not update its guidance during the course of the year except in extraordinary circumstances, such as a securities offering or a material acquisition or disposition.

This way, in between planned updates, the company can deflect investor questions by explaining that it is the company's policy not to comment on prior guidance out of cycle.

3 Do Not Rely on Boilerplate Disclaimers

Explain the assumptions underlying each forward-looking statement and disclose the risks that may cause anticipated results not to be realized. The cautionary statements should be tailored to fit the guidance.

All good guidance should be accompanied by dynamic, carefully tailored cautionary statements. These disclaimers should temper the predictions of a rosy future with a balanced discussion of what could go wrong. Risk factor disclosure should also be appropriately updated with each publication; don't just use the same old boilerplate from prior years.

It is also helpful if the material assumptions on which the guidance is based are disclosed and if the company's risk factors tie to the achievement...