Monday, July 11, 2011

Say No To Half-Yearly Financial Report !!!

The SC launched the 5 year Corporate Governance Blue-Print yesterday. The blue print can be downloaded here. At a glance, some of the measures introduced are welcomed like the use of poll voting for significant related party transactions. However, quite a number of them, I feel are cosmetics reform that add no real value. It is mere adaptation of some corporate governance measure practice by the West that may not necessary worked well in an Asian environment.

However, I am very much against one issue discussed in the blue print, that is, to reduce the current quarterly reporting to a half-yearly one. Although the issue did not make it to the recommendation list, the mere mentioned of it is shocking. I welcomed the decision to shortened the submission time frame for quarterly and annual report to ensure more timely disclosure. But, to shortened the submission time frame of annual report but at the same time revert to half-yearly reporting, it is like taking a half step forward and one step backwards. Net net, we are taking half step backwards.

The implementation of half-yearly reporting would further tilt the information advantage to that of the management, the fund managers and the analysts at the expense of retail investors. The CIO of CIMB-Principal Asset Management has this to say about the measure in an interview with Business Times,

"It will also allow fund managers and analysts more time to go and meet the company (management) to do their analysis ... a lot of times, they have to wait because of the blackout period (during which the company can't talk until the results are out)," he remarked.

He suggested that companies hold quarterly briefings to give investors a "snapshot" on how they are doing, rather than issue financial reports.
What he is implying is that, with a less frequent blackout period, he and his team of analysts can meet with the management more frequently. He could obtain information from the management about how the company is doing, information that is not available to the general public,thereby, gaining an information edge over the rest of the investors. He could then trade with this information ahead of the investors. It certainly makes his job much easier but it is at the expense of retail investors who have no such privileged of getting access to management. The suggestion of holding quarterly briefings instead of issuing financial reports is a self-interested suggestion. Retail investors have no access to such briefings, but, the fund managers have access to such information.

The information advantage extend towards the management. In quarterly reporting, the information advantage that management has over the rest is 4 months as each quarterly report will reduce their information edge. In a half-yearly reporting, the information advantage is about 7 months. So, they have much more time to trade with this information at the expense of retail investors. If the management discloses this sort of information to the analysts and fund managers, the information edge will be shared by the fund managers too. That's the reason you see someone like the CIO of CIMB-Principal Asset Management and Tan Sri Krishnan Tan of IJM pushing for half-yearly reporting. Half-yearly reporting is to their advantage. The management and fund managers may know about the company plant is operating at full capacity on February, but, the retail investors would only know about such information in July. Within the February to July time frame, they can do a lot of trading.

I would also like to address some ridiculous reasons given out by these self-interested person to justify half-yearly reporting. The CIO of CIMB-Principal Asset Management says this,
it is a good move to do away with quarterly reporting as firms will have more time "to run their business" rather than "scramble" to put out reports."
Firstly, it is ridiculous to suggest that it take like 10000 man hours to churn out a quarterly report. With the wide spread use of accounting software, one can actually generate a P&L, balance sheets and etc with a click of the mouse. How hard is that? Perhaps, the CIO do not know how to use a mouse. What one need to do probably after churning out the P&L and stuff is to make sure the relevant accounting standards is apply correctly. In addition, they may make some segmental disclosure and etc. Instead of tallying up six months worth of transactions once every six months as with half-yearly reporting, one is tallying up three months worth of transactions once every three months as with quarterly reporting. It is similar perhaps a bit more work, but, it probably cost shareholders very little money. Why don't the CIO of CIMB-Principal Asset Management suggest that management should do away attending road shows? Isn't that a distraction for the CEO of these companies from running the business? Isn't the time of a CEO is more precious than the time of an accounts executive? So, CEOs and CFOs attending road shows disclosing information to SELECTED investors is "running the business", accounts executive preparing quarterly report to disclose information to ALL investors is a "distraction". Oh, I nearly forgot, without roadshows, you do not have the information edge that you have over the retail investors. So, cannot suggest something that will hit your rice bowl....

Then, Tan Sri Krishnan Tan, another self-interested party said this,

Tan Sri Krishnan Tan, executive deputy chairman of IJM Corp Bhd, said it is becoming "absurd" to put out financial reports every quarter as it isn't a fair reflection of how the company may be doing.

"It doesn't have a lot of meaning ... let's just go for half-year and year-end reporting," he said at a panel discussion on the SC's five-year Corporate Governance (CG) Blueprint, which was launched here yesterday.
In addition, BT article also said this,
quarterly reporting tends to promote short-term views

Although I agree with Tan Sri Krishnan that a quarter is not a fair reflection on how the company may be doing in the long run. It is essential for us to know what is the current financial position of the company. It is our rights to know whether the company position is deteriorating. There are generally signs that can be found from the financials for deteriorating or improving conditions. If the financial indeed do not reflect how a company may be doing, the management can provide explanation on why it is so. Is it appropriate to deny the shareholders rights to know what is happening in a company because sometimes but not all the time, the financial information do not reflect how a company is performing? Do we ban drinking because sometimes, but, not all the time it create domestic violence? But, to be fair to Tan Sri Krishnan, I understand where he came from, he came from an industry where profit recognition is lumpy so, sometimes, a quarter do not mean anything to his company. But, not all companies in Bursa are from his industry.

Then, there is this argument that quarterly reporting promote short term views. Is this the fault of quarterly reporting or is this the fault of how we make use of the information provided by quarterly reporting? Shouldn't we change our attitude towards the information provided rather than blaming it on the information? Plus, a lot of our firms is still family-owned firms with the majority shareholders has a lot of skin in it. The problem of short term-ism is much lesser here and do not affect the fundamentals of a company as much as it does in the West. The short term-ism problem is more of a problem of the analysts who covers the business. As long as it do not affect the business, it is not a major concern. The benefits of quarterly disclosure outweighs the problem cause by short term-ism and short sighted-ness of some analysts.

Then, on SC blue print, it said this,
the European Union issued the European Union Transparency Directive in July 2007 which promotes half-yearly reports combined with Interim Management Statements issued between reporting dates.
Wow, they research the issue so thoroughly that they quote the EU implementation. But, let's see what EU really said to see whether what SC said reflects the intention of the EU Transparency Directive. The EU Directive said this,

More timely and more reliable information about the share issuer's performance over the financial year also requires a higher frequency of interim information. A requirement should therefore be introduced to publish an interim management statement during the first six months and a second interim management statement during the second six months of a financial year. Share issuers who already publish quarterly financial reports should not be required to publish interim management statements.
What the EU is doing is that, the reckon the need for timely information. They want to have a higher frequency of interim information. So, instead of financial information being published ONCE a year, they are now promoting half yearly interim management statement. It is a half step FORWARD, which is expected because it is such a big union that drastic step is rarely taken. Countries that are ahead of the EU standards, that publish quarterly reports, should stick to their superior disclosure requirement. The interim management report is a MINIMUM STANDARD of best practices rather than the best practices. But, our SC spin it to make it sounds like, EU want half yearly reporting with interim management statement. SC says that, instead of sticking with our superior disclosure ruling, we should take a half step backwards and join EU with their minimum standard.

All in all, the half yearly reporting is a measure proposed by all sort of self-interested parties so that they could have the information edge, they could trade ahead of retail investors. They could treat retail investors as some idiots that can be taken advantage of. Say no to half yearly reporting!

No comments:

Post a Comment