The Oracle of Omaha, Warren Buffett, has joined forces with J P Morgan Chase chief executive Jamie Dimon to convince CEOs to end the practice of quarterly profit forecasts, CNBC reported .

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Dimon, in a joint interview with Buffett to CNBC, claimed that executives are often under pressure to make quarterly predictions, and added that the practice often puts companies in precarious positions, and forces their hands on decisions regarding earnings.

Dimon, who leads the Business Roundtable, an association of chief executive officers of leading US companies said the move is supported by the group, added the report.

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Warren Buffett, Jamie Dimon bat to end the practice of quarterly profit forecasts, says report

Edited Excerpt:

Q: This is something you have been preaching about for a very long time too. What is an example of where you have seen it gone wrong?

Buffett: When companies get where they are sort of living by so called making the numbers, they do a lot of things that really are counter to the long term interests of the business. I have never seen a company whose performance has been improved by having some forecast out there by the CEO that we are going to earn X because it is generally sending the wrong message and delivering wrong results to the company and to the country. It is also cheating the people that work under them. Quarterly performances is their end game. I tell our managers just pretend you are going to own, this is the only business you and your family are going to own for 50 years and you cannot sell it and you will make the right decisions.

Q: Have you seen this kind of play out the wrong way either in the boards that you have sat in or the companies that you have owned, are there friends that you have known?

Buffett: I have been on boards of 20 publicly owned companies, not counting Berkshire and I have seen managements that I really think personally, I will be glad if they married my daughter or were named as executors of my will or moved in next door, but they get tempted by the predictions that have been made, their ego gets involved and when they find they cannot make the numbers, sometimes they make up the numbers and it is a very bad practice and once it gets going, it feeds on itself because if your investor relations department tells you that we put out you are going to earn this dollar rate and you got this reputation for making your numbers or beating your numbers, you are going to do some very stupid things at some point because business does not work that way.

For 53 years at Berkshire, I consider Berkshire as an unfinished painting all the time and the horizon really is infinity as far as I am concerned.

Q: What does it mean from a real perspective, are the companies in the business round table, I think there are 200 companies, are they going to not be issuing quarterly guidance at this point?

Dimon: Let me just comment on what Warren said. First of all, this goes down in a company so there could be pressure at divisional level, the sales level, that they should go do something different than they otherwise do and it is easy for CEO to change a short term profit number by not opening a branch that should they open or buy selling more product at a cheaper price, they could hit a revenue number or something like that. So, it just creates a disincentives and like Warren said, it feeds on itself, if you start meeting that and you have to meet it, you have to meet it, years later you find that it is corrupted. So, I think it is a good thing if you are careful about how and when they use earnings guides in particular.

I think of the BRT something like 60 percent of the members do annual earnings guides, I would personally eliminate that to one day. Something like only 20 percent plus or minus do quarterly, but this is a first step to try to get people focus on the long run. I should also say most of these companies, they are pretty good at focusing on long run too in terms of R&D and capital expenditures, this is just one case that we think we should go another step to improve the governance of corporate America.

Q: You mentioned that it is upto CEOs discretion to be able to do this. So if you wanted to, how could you change the numbers of JPMorgan try and do this, if you are more focused on the short-term?

Dimon: You can change interest rate exposure by making a phone call and do some swaps in it - hundreds of million dollars of revenue, you can cut marketing, a lot of people cut marketing because that is one of the easiest things to cut. You can pay people less, it is like airplane maintenance - you can reduce your airplane maintenance but that is a really bad idea. So, people shouldn't be doing those things. You should build the new systems you need, you should do the R&D you need and explain it to your shareholders and your board.

Of course you have some of the CEOs who say it is the buy side, it is the sell side that we put pressure, but I am trying to say to people, be free to drop it. You will be okay, companies have done it, good smart shareholders don't mind, you have the best shareholder in the world sitting right on this TV telling you it is better, he prefers it.

He does want to hear how you are doing, how you think about the future, where you are investing in but he knows it that quarterly earnings, they are function of the weather, commodity prices, volumes, competitive pricing and you don't control that as a CEO, but do the right thing anyway and you will be fine in the long run.

Q: What do you want to hear from companies in terms of guidance, what they tell you and what they don't, so that it doesn't put those artificial constraints on them?

Buffet: I want to hear from them what I wouldn't hear if I were their sole partner in the business and they were the operating partners and I was a person that did not spend day to day at the business but had a significant part of my networth in it and they would tell me periodically that things are very important to me, they would tell me the upside possibilities, the downside possibilities, where they were investing ahead of time and things that might pay off in a few years and I would want them to run it like we are going to be partners for 50 years and keep me informed and don't worry about what we earn today or in the next week. What is magic about the quarter? We are in businesses for a very long period of time.

First Published:Jun 7, 2018 6:24 PM IST