Finally, some meat in corporate disclosures

KUALA LUMPUR: Companies are not allowed to just provide the bare bones in their corporate disclosures (CD) under the amended listing requirements (LR), starting from next year.

According to the amended LR, companies are required to provide “detailed analysis” of the performance of all operating segments in the explanatory notes attached to results announcements.

For example, a statement that says a company’s “net profit grew 50% in this quarter to RM3 million from RM2 million a year earlier due mainly to increased sales” is considered as not complying with the amended LR because it does not shed light on the factors causing the increased net profit.

With the amended LR, the company’s board could be reprimanded by Bursa Malaysia and the company be fined up to RM1 million.

Currently, companies tend to only provide the minimum details in their quarterly financial announcements without any material information at all.

Apparently, for about one-third of listed companies, mostly those with smaller capitalisation, CD are only made to meet the minimum requirements of the LR.

To uphold a high standard of corporate disclosure, Bursa has tweaked the LR recently to improve corporate governance and transparency for listed entities.

Prior to the amendments, there is no prescription of minimum content in the comprehensive income statement, and as such, companies could get away with providing the income statement without important indicators such as Ebitda, impairment and write-offs which are material for investors to analyse the company’s business and operations.

The new LR also require companies to provide the reasons for the cessation of directors, CEO and external auditors. The LR also require the assurance of new directors, CEO and CFO to have the “character, experience, integrity, competence and time to discharge their role”.

In addition, the CD Guide says selective disclosure of material information is prohibited. For instance, it is wrong for companies to only reveal material information to a group of fund managers but not to the investing public.

To assist companies to comply with these higher standards of CD requirements, Bursa Malaysia has come up with a 74-page CD Guide. While the guidelines provided in the CD Guide are not mandatory, the guidelines are meant to help “listed issuers to better understand their disclosure obligations and improve overall transparency in the marketplace”, said Bursa CEO Datuk Tajuddin Atan in a press statement.

Some of the highlights in the CD Guide include the advocacy for disclosure of five-year financial highlights in CD, and the inclusion of management discussion and analysis in the annual report. Presented in a clear-cut way, the CD Guide provides guidelines on how to use plain language in announcements, how to provide disclosures to journalists and fund managers, and how to provide profit guidance amongst others.

Bursa Malaysia has stressed that the CD Guide is not just for CEOs and companies, but also for investors and the general public.

Amendments to the LR will take effect from Jan 3, 2012, and financial periods/years ending Dec 31, 2011 must comply with the new LR.

Bursa Malaysia said it had consulted with stakeholders and companies since July last year to come up with the CD Guide. As early as this Friday, Bursa Malaysia will begin to engage CEOs and directors in the advocacy programmes, to educate them on the new LR and CD Guide. The stock exchange would proactively engage with audit committees and boards of directors on issues of concerns.

The amended LR are seen as a step towards the right direction. However, some quarters have raised the question that since the guidelines spelt out in the CD Guide are not mandatory, would companies take them seriously?

Generally, those that provide minimal disclosures are mostly smaller companies and some of them have already complained that the current quarterly financial announcement is rather taxing as other stock exchanges only require companies to release financial results twice a year.

That said, from the investor perspective, the more the better in terms of disclosure. As for listed entities, that is the rule of the game when companies want to tap the capital market for funds.