Setting performance targets for listed companies
SSL In The Money
I was listening to the CEO of one of Jamaica's largest and strongest publicly listed companies recently indicating that the reason they do not give projections is because of the unpredictable economic environment in Jamaica.
That, by the way, has always been the case. Sadly, there are quite a number of publicly listed Jamaican companies who do not give projections on financial and or other performance. The fact that they don't provide forecasts begs the question: How else are they to be taken seriously?
In markets that take themselves seriously, and not just those in the First World, but also those in emerging markets, giving projections is a requirement and, uncertainty is all part of the game. The global environment now is beset by uncertainty. Even in the USA and Western Europe the most developed capital markets uncertainties over fiscal cliffs and a Eurozone debt crisis, etc, does not stop companies from giving projections. As economic circumstances change, it simply means that both the company and market analysts have to adjust their projections.
Not only should companies start giving projected earnings, but companies must also give their analysts' expectations of how well or badly they expect the company to perform regarding its customers and market share, its internal efficiency (processes), and its own innovations on new products and services. In other words, a balanced scorecard- type approach. This makes for a more transparent and robust market and it adds to the measuring of a company. When a company meets or exceeds targets they get rewarded, when they fail to meet expectations, without reasonable explanations, they get punished. This is a fair way to reward or punish a company's stock price. It is also a fair way to assess the performance and compensation of senior management.
As such, one way to grow your stock price is to set targets and beat them. Why are we afraid to have our performance benchmarked? That's what serious companies do. All listed companies, particularly those on the JSE (Main Market), should consider themselves serious companies.
During tough economic times, a company whose earnings decline at a slower pace than the market average should be praised for their performance. Analysts should recognise this and give credit where credit is due. The onus isn't only on the companies to set targets, but also on the analyst community to be mature, fair and thorough. To that end, I must also add that the analyst community needs to be expanded in Jamaica. This may help to give confidence to those firms afraid of setting targets and being judged by their performance in respect of those targets.
Having said all that, there are challenges to setting performance targets in recessionary times. Recessions, however, should not dissuade the setting of targets for the following reasons. It is more often the case that what gets measured gets done. Setting targets and holding yourself accountable to them, and to the market, forces the company to focus on those things that will yield the results being measured. This is a good thing. It improves decision-making, particularly in regard to which projects to undertake and what risks are to be taken.
Targets promote a company-wide understanding of what needs to be done for the business to do well, thus making expectations very clear. This is an excellent tool for mid-level managers charged with motivating line staff to increase productivity. It provides an objective way for the company and the market to assess the health of the company. Also, it encourages feedback from the analyst and shareholder community. Extensive feedback and constructive criticism are benefits private companies don't have.
To sum it all up, stating financial and other performance targets is "goal setting". Goal setting senior managers know where they want to take a company, and setting performance targets is a clear indicator to shareholders the intended course of action. As such, being judged quantitatively on the success or failure to meet these targets, ceteris paribus, makes for a more robust stock market, builds the confidence of the investing community, and encourages both new and existing investors to make larger investments and execute more trades. Essentially, it is a win-win scenario for both investors and publicly listed companies.
Kevin Jones is an Assistant Manager of the Wealth Division at Stocks & Securities Limited and can be contacted via firstname.lastname@example.org.