Is less better when it comes to SGX's reporting framework review?

THE recent call for public consultation on the quarterly reporting framework by the Singapore Exchange (SGX) has reignited the ongoing debate about quarterly versus semi-annual reporting. Besides Singapore, countries such as the United States, Canada, China and Malaysia also require companies on their major stock exchanges to report on a quarterly basis. Economies with semi-annual reporting include Australia, the European Union, Hong Kong and the United Kingdom, although some companies in the UK and Hong Kong are required to report on a quarterly basis. At the heart of the debate is the issue of "costs versus benefits" of quarterly reporting compared to semi-annual reporting.

Opponents of the quarterly reporting framework point to the rising burden of compliance and reporting costs in listing on SGX and highlight the need for SGX to be competitive in attracting listings. Anecdotally, we have seen companies (for example, Osim International) cite the detrimental impact of the quarterly reporting framework as a reason for their voluntary delisting. However, quarterly reports are not required to be audited, and current technological advances in data and information systems would reduce the cost of producing quarterly reports. The quarterly reporting framework is unlikely to be a major deciding factor for companies because the choice of stock exchange to list on is largely dependent on other factors such as the liquidity of the stock exchange.

Opponents also claim that instead of focusing on long-term sustainable performance, companies that report quarterly are more likely to take a short-term view of operating and investment decisions to meet performance targets. However, sustainable long-term investment requires a multi-year time horizon and companies are unlikely to take a long-term perspective on investments simply because the quarterly reporting framework is replaced with a semi-annual one. Instead, SGX's current initiative towards the framework of sustainability and integrated reporting may be more effective in achieving the objective of companies focusing on long-term sustainable performance.

Proponents of the quarterly reporting framework point to its main benefit: companies are providing more timely disclosure of information, and hence there is increased transparency for investors. With increased transparency, investors can avoid making wrong investment decisions, companies can benefit from a lower cost of capital, and the economy as a whole can benefit from more efficient capital allocation. Evidence from academic research on this issue is somewhat mixed. Some studies find that the information in quarterly reports is useful to investors and helps reduce the cost of equity, while other studies suggest that investors only use information in annual but not quarterly reports. With inconclusive evidence, we suggest that SGX take a cautious approach when deciding whether to retain the quarterly reporting framework.

The proposal by SGX to simplify the first- and third-quarter reports by requiring companies to report just their balance sheet, income statement, cash flow statement and commentary of significant trends and competitive conditions is welcomed. This approach will not only reduce the costs of quarterly reporting, but will also make the information in these quarterly reports more user-friendly and accessible to investors.

With the proposed simplification and increased relevance of the first- and third-quarter reports, we are concerned about SGX's proposal to increase the market capitalisation threshold to S$150 million for mandatory quarterly reporting by companies. In fact, quarterly reporting by smaller and high-growth companies is more beneficial to investors because there is usually less information available to them on these companies. Such companies are less likely to be covered by financial analysts who tend to focus more on larger and more stable companies. In fact, in Hong Kong and the UK, quarterly reporting is only required for companies listed on the Growth Enterprise Market and the TechMark of the London Stock Exchange respectively. These companies are smaller and higher-growth companies that are inherently riskier and tend to disclose less information to investors. If SGX increases the market capitalisation threshold for the quarterly reporting framework, it needs to be mindful of investors' ability to obtain information on smaller and higher-growth companies.

We recognise that some companies may find that the costs outweigh the benefits of quarterly reporting. Minority shareholders, who tend to be smaller retail investors, benefit the most from the quarterly reporting framework because they tend to rely mainly on company-disclosed information. If the minority shareholders could be convinced that their information needs will be met with semi-annual reporting and that the reduction in compliance and reporting costs would ultimately benefit them as shareholders, companies should be able to discontinue quarterly reporting. Thus, we believe that SGX's proposal to allow minority shareholders to vote on whether to discontinue or delay commencement of quarterly reporting for a period of three years is a move in the right direction.

In deciding whether to retain the quarterly framework, we urge SGX to take a prudent approach. The proposed changes to the first- and third-quarter reports would make the information in them simpler and more relevant to investors. However, the proposed increase in the market capitalisation threshold could potentially hinder minority shareholders' access to information from smaller and high-growth companies. We hold to the basic premise that more is always better than less in terms of disclosing information to investors.

All else being equal, more disclosure typically means greater transparency, which in our opinion, usually leads to better decision outcomes. Shareholders, especially minority shareholders who are the main beneficiaries of quarterly reporting, should ultimately have the final vote in whether quarterly reports be retained or not.