Quarterly financial reporting 1 comments

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It was sometime in October last year when the issue of the merits of quarterly reporting were first questioned by a corporate bigwig, none other than DBS head Jackson Tai, on the premises that it placed undue stress on listed companies. And of course, more might remember the rather public spat between the same bigwig and OCBC chairman Cheong CK, which also arose out of the former raising the same topic of quarterly reporting and going further to criticise the capital management practices of industry peers.

Insofar as promoting retail interest is concerned, increasing corporate transparency is paramount, and increasing the frequency of financial reporting is a step in the right direction. The issue then, becomes one of balancing the interests of the investing public versus that of the listed companies.

Let's look at the company side first. The original quarterly reporting proposal called for compulsory quarterly reporting for companies with market capitalisation S$20M and above. This was later revised to encompass a smaller slice of the Singapore market, covering the top 35% with capitalisation S$75M and above. That would already reduce the burden on the smaller listed companies. These quarterly reports also do not have to be audited. For the larger companies, surely they already have financial systems in place that would facilitate financial reporting without excessive scrambling? That is the cost of listing, in exchange for the convenience of being able to tap the mass market for cheap capital.

The argument against quarterly reporting also extends to attempts to appeal to the long-term investor: quarterly reporting apparently encourages short-termist management thinking because management have to manage investor expectations quarter-by-quarter instead of half-yearly. This view, of course, gives too little credit to the investor's abilities to discern what are short-term/seasonal operational weaknesses and longer-term performance trends. Furthermore, the mark of a good management is to manage for both the short and long term: one simply cannot assume that the two are mutually exclusive.

It is my belief that arguments can often be framed to support two conflicting viewpoints, depending on the preferences of the individual. For example, it may be argued that the recent scandals of CAO, Citiraya and ACCS were caused by short-termist thinking emanating from the need to please shareholders every quarter and support the share price. This may be true, because derivatives were a high risk-high reward segment which were hardly the core business of CAO, while ACCS and Citiraya might not have engaged in such aggressive/illegal practices if not for the pressure to support their growth stock tag with financial results as evidence quarter after quarter. Yet on the flip side, one can also argue that it is precisely these incidents that illustrate the need for increased corporate transparency through regular financial updates.

As for the investor side, the position is clear: more information is a good thing, especially in the form of financial statements which are more impartial and less easily subject to sugarcoating. Already there is an information disadvantage for the small investor compared to institutional holders who by virtue of their financial clout and operations will be able to access management easily. Quarterly financial reporting will benefit retail investors more than these institutions. As a small investor myself, I am of course in favour of any measures that will reduce this assymetry of information accessibility. I am sure that all or most minority shareholders will be in favour of quarterly reporting despite all the "cons" associated with short-termism as discussed above, and surely their views should be listened to: they are part-owners of the company as well.

Singapore, of course, prides herself as a pro-business country, and although she has creditably stuck fast to the quarterly reporting requirement despite the complaints from corporate leaders, the pro-business position is probably what has prevented more "draconian" measures like the Sarbanes-Oxley Act from entering our shores. I would argue that measures to improve corporate transparency (such as quarterly reporting), rather than encouraging short-termism, will instead ultimately improve general investor confidence and retail participation, and allow market re-rating and attraction to large listings. That, contrary to what corporate bigwigs might claim, IS the long-term picture (for the SGX).

References:
(1) Financialpracticies.org Oct 19 2005 article: Singapore Reinforces Importance of Quarterly Reporting
(2) Wallstraits article 6 Nov 2001: Quarterly Reporting