Date: March 12, 2018
First published in Straits Times on 12 March 2018
After moving to a disclosure based regime, mandatory quarterly reporting (QR) was introduced here in 2003. Opinions have been divided as to its usefulness, which means regulators have had to constantly grapple with clamour from some quarters to scrap the practice, while at the same time answering the countervailing demands of others who want QR retained.
The practice has been reviewed and revised over the past 14 years, and the Singapore Exchange (SGX) is currently calling for feedback on its latest consultation paper on the subject, which includes proposals to allow minority shareholders to vote on either retaining or scrapping QR and to raise the reporting bar to companies above a market capitalisation of $150 million from the current $75 million.
The reason, a delicate balancing act is needed is that like many other issues relating to disclosure in the stock market, there are no clear-cut answers – for every argument in favour of QR, an equally compelling reason against it can be found.
For example, company managements have claimed that QR encourages short-termism and unnecessary share price volatility every three months and other compliance costs, while shareholders and investors have countered that it is only right in a disclosure-based regime that they receive regular updates on how their investments are performing. Shareholders might also argue – quite logically – that sustainable long-term investment requires a multi-year time horizon and it is unlikely that companies might abruptly switch to long-term planning just because QR is scrapped, leaving semi-annual reporting.
Company bosses have also complained of onerous costs and a waste of resources while shareholders have argued that with technological improvements, the cost of more frequent reporting should not be significant, while doing away with QR can only accentuate the information asymmetry which already exists between majority and minority interests, or insiders and outsiders. Moreover, although large shareholders and institutions are more likely to have close access to company officials, small shareholders do not enjoy such contact, which means they require more regular updates.
Then there is the argument that SGX should align its practices with other developed markets such as Hong Kong, Australia and Britain, where financial reporting is semi-annual, although some companies in Hong Kong and the United Kingdom do have to file quarterly statements. In reply, proponents of QR then might argue that what’s good for some other developed markets may not automatically be good here and in any case, the United States and Canada require reports every three months, so not all developed markets have shifted away from QR.
By now it should be clear that there are no easy answers and any number of justifications can be found for and against QR. How then to resolve the issue? The answer lies in recognising that much depends on who is asked about QR’s usefulness. If company managers are asked, they would naturally lobby for scrapping the practice because they have to do the actual work and bear the costs; if shareholders and investors are asked, they would demand QR’s retention because, for them, more information is better than less.
The Securities Investors Association (Sias) has been of the view that a developed market must offer a playing field that is as level as possible, and this means priority must always be given to the needs of shareholders and investors first. The starting position therefore has to be retaining QR, and only once this is agreed upon should there be tweaks to the rules to try and accommodate the demands of corporates.
So far this has been the approach adopted by local regulators, with the present requirement being that only companies with a market cap of at least S$75 million need file quarterly reports, the thinking being that size is a good gauge of a company’s financial strength.
The proposal now being considered is to raise this to S$150 million in order to allow more “smaller’’ companies that are presumably more cash-strapped than larger counterparts to avoid QR. In the January 22 issue of The Business Times however, some market observers in the “Views from the Top” article spoke of this figure being somewhat arbitrary; by the same token, others noted that market cap generally correlates with a company’s financial resources and it is acceptable as a primary basis on which to frame QR rules.
On balance, doubling the reporting threshold – although arbitrary – should be seen as a move in the right direction. While smaller companies, which might find the QR too costly, are exempted, larger firms tend to be more complex and therefore have more reason and information to communicate.
However, the market cap rule cannot be the sole determinant as there is an argument that firms with opaque operations, qualified audit opinions and/or questionable track records when it comes to disclosure and shareholder rights should be made to communicate more frequently. SGX should therefore reserve the right to require certain smaller firms that might fall below S$150 million to adhere to QR if it sees fit. This is a risk-based suggestion and would gel with that made by other market proponents.
SIAS also suggests that smaller firms that fall short in their compliance with the Corporate Governance Code be required to provide quarterly reporting, till they achieve the required standards.
The proposal to require minorities to vote on QR has an appealing logic because:
(a) it places the onus on management to offer convincing reasons to the parties most affected by the QR question, namely, shareholders, as to why QR is not necessary for their companies; and
(b) it forces greater shareholder participation.
On point (a) it would make sense for companies that operate in mature industries and whose revenue and profit streams are quite stable, or at least non-volatile, to present their cases to their shareholders if they feel that QR is not needed.
As for (b), the onus would therefore be on small shareholders to attend their meetings with management and to take an active role in the affairs of companies in which they own shares. This helps to address perennial criticism of shareholder apathy, if a company then receives the mandate from its shareholders to suspend QR, there should be no complaints afterwards.
The bottom-line is that although the guiding rule has to be more information is better than less, there is some scope for being sensitive to the market’s needs and finding a suitable middle ground. The latest SGX proposals to fine-tune QR clearly fit this bill, though it has to be recognised that as the market continues to evolve, more fine-tuning in the future might be warranted.
David Gerald
President / CEO
Securities Investors Association (Singapore)
