Building trust through proper continuous disclosure

WHEN the Singapore Exchange (SGX) relaxed its rules for quarterly reporting in January, it simultaneously said it was strengthening its continuous disclosure requirements.

The move to do away with mandatory reporting every three months was - not surprisingly - almost unanimously welcomed by the corporate sector as it should save time and cost, whilst the exchange's emphasis on risk-based regulation, ie placing more regulatory energies on companies that have been flagged as potentially troublesome and less on those with track records of good conduct, was hailed as keeping with the times as it is in line with practice in other markets.

However, given the spotlight now placed on continuous disclosure, it is important to ask: what exactly does it mean for listed companies? The short answer comes from Rule 703 of the Singapore Exchange's (SGX's) Listing Rules as well as Appendix 7.1, which says that listed issuers have to immediately inform the market of any information that might lead to a false market for the issuer's shares, as well as any material developments that could affect the share price.

This much all companies must surely know - after all, Rule 703 also requires all company officials to be familiar with the exchange's disclosure rules. However, despite presumed widespread knowledge, it would be fair to say that, in many cases, observation of the requirement though in compliance with the rules is only perfunctory.

Where possible, corners are cut, only general, watered-down information is delivered and when potentially negative news is to be announced, it sometimes appears under bland, non-informative headlines, probably in the hope that the market might overlook it. All this is, of course, contrary to the spirit of continuous disclosure.

To be fair, SIAS recognises that it is not possible to ensure that everyone adheres to the spirit of the rules all the time as there will be grey areas for which there are no clear answers.

There will also always be companies which, for some reason or the other, might have managers and directors who prefer to keep their disclosures to the absolute minimum, possibly out of a belief that it is their duty to protect their share prices at all costs - even at the expense of losing the market's trust.

For these reasons, SIAS offers listed issuers the following guidelines that have been formulated to help companies play their part in a continuous disclosure regime.

"When in doubt, disclose''

When should companies issue profit warnings? If a company is embroiled in legal action in a foreign country, the outcome of which is uncertain, should it inform the market? What if it looks like winning a lawsuit and might receive a windfall settlement?

All these and many more fall within the ambit of "grey areas'' mentioned earlier for which there are no clear answers. Some companies complain that they often find themselves caught between a rock and a hard place when trying to observe continuous disclosure - if they release information that could have a material impact on their share price but, if it doesn't materialise, they might face a market backlash for jumping the gun; yet if they keep silent, they could face regulatory sanctions for failure to observe continuous disclosure rules, if the information turns out to be material.

SIAS's advice is to err on the side of caution, or practise "when in doubt, disclose''. This was the advice that Mr Tan Boon Gin, (who was then SGX's chief regulatory officer), had for directors and corporate leaders gathered at the Singapore Institute of Directors' (SID's) State of Corporate Governance Disclosures forum in August 2016 when he spoke of the importance of trust. The importance of trust cannot be underestimated.

Don't bury or fudge

Companies sometimes bury significant information or numbers in footnotes or other seemingly routine announcements. SIAS's advice is that these often prove to be exercises in futility - if the information is material, it will surface later and, when it does, the damage to the company's reputation and the resultant erosion of trust could be irreparable. Companies should not sacrifice long-term interests to avoid short-term pain.

Build trust through regular stakeholder engagement

The need to be forthright and build trust extends beyond day-to-day disclosures, to how the company handles meetings with its shareholders and how much respect is demonstrated to all parties.

In this regard, it might be useful to note that the Singapore Governance and Transparency Index includes a component on this very subject and SIAS's advice is that companies who are earnest in improving their governance should familiarise themselves with the contents of this component and try as far as possible to satisfy all the criteria.

For example, some of the questions are: At Annual General Meetings (AGMs), does the company disclose the voting and vote tabulation procedures used, declaring both before the meeting proceeds? Do shareholders have opportunities to ask questions in the latest AGM, and does the meeting minutes record details of shareholders' questions and answers? Does the company disclose the appointment of an independent party (scrutineers/inspectors) to count and validate the votes at the AGM?

The aim of all of the above is to build trust between companies and their providers of capital. After all, trust is the bedrock of any market - without it, interest will dwindle, and investors will look elsewhere.

"Ours is a disclosure-based regime. Without proper disclosures, there can be no good governance, no trust in companies and no confidence in our markets," said Mr Tan Boon Gin in his 2016 SID speech.

Get yourself Fast Tracked - and work with SIAS

SGX not long ago unveiled its Fast Track programme that rewards companies who have shown and practised good governance. In announcing the list of qualifying firms, Mr Tan said the exchange's evaluation of who qualifies in future will, among other criteria, include engagement with other market stakeholders such as SIAS.

In this connection, SIAS would like to draw attention to its three questions that are sent to companies before their AGMs. The topics touch on the company's financials, corporate strategy and governance and the aim is to secure answers as soon as possible so that shareholders are equipped with useful insights when they attend the AGM.

So far, although more than 500 companies are sent these questions, the response has been patchy. Hopefully, with the aid of the Fast Track carrot, this will change.

The ultimate aim of continuous disclosure is to build a market that operates a level playing field and is one that everyone can trust. When this is achieved, everyone benefits, and listed companies should bear this in mind.

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