Financial Planning and Investor Communications at GE (With a Look at Why We Ended Earnings Guidance)

Authors


  • This is an edited version of the author's presentation at the University of Notre Dame Center for Accounting Research and Education (CARE) conference on “Financial Statement Analysis and Valuation: Forecasting Firm and Industry Fundamentals” held at Coral Gables, Florida on April 9, 2010.

Abstract

In this edited version of a talk given at a conference of accounting academics and corporate practitioners, the Vice Chairman and Chief Financial Officer of General Electric describes the company's internal budgeting and financial planning process, and how the information generated by this process is communicated to investors. The company's business model—the common thread running through all its different businesses—is to make large investments in technology that make possible the firm's equipment sales, which in turn provide the basis for a profitable long-term services business. The main role of the company's internal analysis and planning process is to help management allocate capital in a way that produces long-run growth in revenues and earnings but, most important, a competitive return on investor capital.

Another major aim of the company's planning process is to help management identify and manage major risks that could interfere with management's ability to carry out its strategic investments and goals. The company's focus on risk management is both reflected in, and facilitated by, a forecasting process that puts less emphasis on the accuracy of “point estimates” and pays greater attention to the range and distribution of possible outcomes. “What we really care about,” as the author says, “is the quality of the thinking and the dialogue among our managers that takes place around the forecasting process.”

And it is the output of these internal processes, and “the quality of the thinking and dialogue” behind it, that are “the essence of what the company is trying to communicate to analysts and investors.” Instead of holding up quarterly earnings targets—a practice the company ended in 2008—management's communications with investors are intended to create “a continuous flow of information and feedback about the ongoing performance, investment opportunities, and risks confronting the firm.” In the author's words, “Ending the firm's longstanding practice of holding up earnings target s to the Street, and then trying to meet them, helped us rid ourselves of needless pressures and burdens… that can get in the way of managing for long-run growth and profitability.”

Ancillary