SINGAPORE (June 10): One of the last things we used to do before closing each issue of The Edge Singapore in our early days was hammer out a little column called “Behind the Stories”. As its name suggests, its purpose was to explain why we had pursued the key stories in our pages in any given week, and provide some additional context and insight for which there might not have been room in the stories themselves.
On one particularly hectic closing night almost 17 years ago, I remember having to dictate significant portions of the column to our copy-editing desk in Kuala Lumpur over the phone. The opening sentence of the column that week (Issue 36, Nov 4, 2002) read: “It’s reporting season again — whether Temasek chairman S Dhanabalan likes it or not.”
Dhanabalan had put on record his objection to quarterly reporting the week before, shortly after the government had agreed to require locally listed companies to adopt the practice from January 2003. “We seem to have tilted in favour of traders in stocks, rather than investors in stocks,” Dhanabalan had complained in a speech that was widely reported at the time.
Ironically, many Temasek-linked companies were already reporting their financial numbers on a quarterly basis. In fact, there were at least three stories on Temasek-linked companies that had just reported their quarterly earnings in that week’s issue of The Edge Singapore.
For me, the argument that quarterly reporting encourages short-term thinking by companies and investors was as unconvincing then as it is now. The goal of eschewing short-termism ought to be pursued not by restricting financial disclosures but by pushing the boards of public-listed companies to ensure that their employees are appropriately incentivised to achieve their strategic objectives and long-term financial targets. And, when a company effectively communicates how it creates shareholder value, it will naturally garner the investor following it deserves.
As an investor, I also find it hard to accept the argument that quarterly reporting ought to be scrapped because it is too costly. Any company that aspires to go public ought to be prepared to bear the cost of keeping investors abreast of its financial performance. Are the cost savings of reporting twice a year instead of four times really so significant in the Information Age? Shouldn’t regulators be pushing companies to cope more efficiently with quarterly reporting instead of asking investors to accept less disclosure?
SGX review of quarterly reporting
Unfortunately, it seems that quarterly reporting is under attack again. Last year, the Singapore Exchange began a review to determine its usefulness and came up with refinements. Among the proposals it mooted in a consultation paper dated Jan 11, 2018 were the possibility of doing away with quarterly reporting or raising the market capitalisation threshold for companies required to report quarterly from $75 million to $150 million.
SGX explained in the consultation paper that about 70% of listed companies are now required to report quarterly, up from 37% when quarterly reporting was implemented in 2003. Shifting the market capitalisation threshold from $75 million to $150 million would mean that the proportion of listed companies required to report quarterly would fall back down to about 38% (according to market data in 2017). In short, nearly half the companies currently required to report quarterly would be freed of the burden.
Clearly, it would be the smaller listed companies that would no longer be required to report quarterly. While it is these smaller companies that are likely to find producing quarterly reports especially onerous in terms of financial cost and management bandwidth, it is shareholders of these relatively high-risk companies who would probably want more frequent financial reporting.
Interestingly, in Hong Kong, companies listed on the secondary Growth Enterprise Market are required to report quarterly, while companies listed on the main board are required to report semi-annually. The reasoning is that companies listed on GEM are riskier.
SGX also raised the possibility of leaving it to minority investors to vote on whether their companies should discontinue quarterly reporting for periods of three years at a time. On the face of it, this proposal seems sensible. After all, if minority investors have no use for quarterly financial reports, why should companies be forced to produce them?
My own sense, however, is that investors like me, as well as the market as a whole, would be worse off if this proposal were implemented. Large institutional shareholders may well be prepared to support a discontinuation of quarterly reporting at companies in which they are invested, because they have easy access to the company’s management. On the other hand, small investors like me, who rarely even attend shareholder meetings, could find ourselves left out in the cold.
Furthermore, financial disclosures by companies are used not just by their existing shareholders but potential investors too. Less frequent financial disclosures, especially at a time when the brokerage industry is not producing enough research, could result in less investor interest in general.
Awaiting MAS decision
SGX says that its proposals on quarterly reporting have been submitted to the Monetary Authority of Singapore for a decision. It is my hope that MAS maintains the status quo.
The level of trust in the local market is currently under pressure from financial turmoil at Hyflux as well as an investigation into the accounting practices at Noble Group. Meanwhile, the ongoing trial of alleged stock manipulator John Soh Chee Wen has brought to light evidence of long-standing and widespread malpractice by brokers. Loosening disclosure standards now could leave regulators appearing to be out of step with sentiment on the ground.
Regulators should instead help companies reduce the cost and improve the usefulness of their financial disclosures. For instance, they could push companies to make investments in the appropriate technologies to reduce the administrative burden of quarterly reporting. They could also look into implementing processes that reduce the “noise” inherent in quarterly financial numbers arising from estimation errors in accounting accruals or arbitrarily allocated period costs, which were among the findings of an academic study on the usefulness of quarterly reporting cited by the SGX consultation paper.
More importantly, companies should perhaps be encouraged to report their financial performance without the “success theatre” of emphasising targets and milestones that were achieved while downplaying metrics that hint at looming trouble. When it comes to reporting financial performance, the boards and management of companies should behave like stewards rather than salesmen. Financial reports that provide an honest and unvarnished account of the state of a company would be far more useful to investors, and probably much less expensive and exhausting to produce and present.
This story appears in The Edge Singapore (Issue 885, week of June 10) which is on sale now. Subscribe here
