Quarterly financial reporting: boon or bane?

Areca Capital CEO Danny Wong.

WITH many jurisdictions scaling back on the frequency of financial reporting, Malaysia’s stock market regulators are also studying this possibility.

The consequences of doing this, however, may be negative for Malaysian equities.

The earnings of companies listed on Bursa Malaysia have been slowing in recent years, making them a less attractive option for investors.

On top of this, the country’s stock exchange was among the worst-performers in region last year, declining some 4.7% during the period.

Will providing less frequent disclosures to investors - particularly foreign investors who are less familiar with Malaysian stocks - make things worse?

The fight for foreign capital in the region is already intense, and the concern is that the move will make Malaysia a less attractive option compared to its neighbours.

Perhaps the half-yearly reporting period works for Singapore, given that it is a high-income developed economy, and is well within the radar of international investors.

But Malaysia, as an emerging economy, one could argue, may not yet be at that point.

Areca Capital CEO Danny Wong also shares this view, saying he feels that Malaysia is not ready for the longer reporting period.

“As an emerging market, Malaysia needs to provide investors with more updated news and data for investment decisions due to the nature of volatility and size of the market, ” he says.Malaysia used to enjoy strong weightage on the Morgan Stanley Composite Index (MSCI) Emerging Market index, but this has dwindled over the years, and the country has somewhat slid off the radar of many fund managers.

In this perspective, it is probably best for Malaysian companies to provide as much up-to-date data via quarterly reports in order to win over investors’ confidence.

Needless to say, investors prefer more frequent disclosures as it allows them to track more closely the performance of the companies they have put their hard-earned money in.Back in 1999, when Malaysia first introduced quarterly financial reporting, it was among the first few countries in the region to do so.

The move was aimed at restoring investor confidence in the aftermath of the Asian Financial Crisis, which had wreaked havoc on economies across the region.

Prior to that, Malaysian-listed companies were only required to release financial reports once every six months.

Other neighbouring countries soon followed suit and introduced the requirement for quarterly reports (QR) in their own markets.Today, some twenty years later, Bursa Malaysia is once again looking at whether it is time to go back to the less frequent reporting schedule.

It does, after all, seem like the right way to go, given that many developed markets have already reverted to half-yearly financial reporting.

Among the main reason markets in the UK, EU and Hong Kong, and more recently Singapore, have chosen to do this is to reduce compliance costs and lessen the regulatory hassle for companies.

Bursa Malaysia said last week that it had begun a consultation process at the end of 2018 to gauge how its stakeholders feel about the current quarterly reporting framework.

This, it said, was following developments in the global market and growing discussion on the issue.

This is not the first time the stock exchange is mulling reverting to half-yearly reporting, as the framework was also reviewed back in 2013, but found that quarterly reporting was still “relevant and required” by investors.

For Institute of Corporate Directors Malaysia (ICDM) CEO and president Michele Kythe Lim, financial reporting should focus on the quality of the disclosure, rather than the reporting frequency.

A reporting reform, she tells Star Bizweek, will encourage higher quality of reporting, instead of becoming just another box-ticking exercise.

“It allows companies more time to consider their strategy and narrative in positioning their company’s performance, vis-à-vis their plans and market environment, ” she says.

Moving towards half-yearly reporting, she adds, would also present an opportunity for companies to provide ‘real-time storytelling’, or to present a more holistic perspective of the company’s strategy, initiatives, risks, challenges to the performances.

This, Lim says, will provide investors and stakeholders with a better and more broad understanding of the performance and overall circumstances of the said company and in turn, be able to make better investment or business decisions in relation to the company.

In Singapore, she notes, only companies associated with higher risks are required to present quarterly reports.

“This move might incentivise companies to ensure better business conduct and performance, ” she says.

Minority Shareholders Watchgroup CEO Devanesan Evanson concurs with this, saying the current “one-size-fits-all” approach for listed companies is unfair to the low-risk and better managed companies.

“Bursa Malaysia can set its own parameters to determine which companies pose a risk and are are required to announce quarterly results, ” he said in a recent interview.

Devanesan says shareholders also stand to benefit from the shift, as companies will be able to channel the resources previously spent on compliance, into their business performance.

Another downside of quarterly reporting is in terms of competitiveness and the attractiveness of the stock exchange itself, particularly for companies looking to list on the stock exchange.

Malaysia faces a very real possibility of losing potential IPOs to Singapore and other jurisdictions, given the lower regulatory requirements there.

As it is, Malaysia has had very few large IPOs to speak of in recent years, and this could worsen if Malaysian companies opt to list in Singapore over Malaysia for this reason.

Supporters of the move towards fewer reporting periods also often cite the short-term mindset QR creates among investors, and also companies.

Investors tend react to quarterly financial performance by buying or dropping the stock - just based on the performance for the three-month period, instead of based on a more long-term outlook.

Will companies benefit?

Another point to note, is that Malaysian listed companies have been providing QR since 1999, and they have become quite accustomed to this practice, and the short-termism that comes with it.

The earnings performance, meanwhile, has seen an overall downward trend in recent years.

A question to raise here, is that if companies are able to shift towards a more long-term focus, will this be able to push earnings back upwards?

Resources previously spent on preparing quarterly reports, and paying auditors fees, can be channeled into performance, and the top management of companies can take a breather from worrying about short term reporting and share price movements, and instead focus on improving profits.

There are many compelling reasons to move to half-yearly reporting, and with many developed markets leading the way, it seems like the sensible path to take.

The question is, is Malaysia actually ready to make this change, or will it prove detrimental, with foreign investors preferring other markets which provide more frequent and up-to-date disclosures?

Whichever the better option is, shareholders and businesses will all be able to weigh in on this via the public consultation that Bursa Malaysia will be embarking on in the near future.

The stock exchange is also in the midst of analysing feedback from the industry on the issue, and hopefully, will soon come up with an approach best suited for the Malaysian context.

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