Sometime, all Hong Kong listed companies could be required to report at least quarterly on their financial performance. But in what form will these reports be required? Will they need a full earnings and balance sheet statement? And will they lead to short-termism with investors focussing more on quarter on quarter performance?
It is fair for the Hong Kong Exchange (HKEx) to have consulted on some form of quarterly reporting, which is mandatory in the US, Europe and elsewhere in Asia. And it’s not surprising that it consulted on a detailed and demanding level of quarterly reporting akin to the US style.
But following the Exchange’s (repeat) attempt, in August 2007, to introduce mandatory quarterly reporting for Main Board listed companies, it would not be surprising if the chorus of dissenting voices, including some of Hong Kong’s best known companies, had the effect of reducing and postponing the mandatory reporting requirements first proposed by the HKEx.
In fact, press reports suggest that the HKEx’s original proposals may be an acceptance by the Exchange that the requirement to include a consolidated income and balance sheet statement in quarterly reports was too high a price to ask in the name of market transparency. This is particularly true given that other markets (notably the UK) do not ask this of their listed issuers.
The HKEx’s proposals for consultation on quarterly reporting were significantly more extensive than the equivalent interim reporting in the UK, which does not directly require income and balance sheet statements.
The UK approach differs and is less burdensome than these proposals. Broadly speaking, the UK approach is positioned somewhere less than full earnings for the quarter but more than merely a trading update. The UK requirements have a somewhat convoluted timing requirement. The HKEx proposals seemed simpler and better in this regard.
So what has changed? Is it just that international best practice and corporate governance dictates a move towards quarterly reporting, or is there something more?
If anything, the Exchange’s recent proposals are evidence of the changes in the dynamics of the Hong Kong stock market over the past few years, with Hong Kong’s future being now, more than ever before, linked to China. With an increasing number of dual H-Share and A-Share companies, this has presented an anomaly of sorts; quarterly reporting is mandatory for all Mainland listed companies but voluntary in Hong Kong. Clearly this needs to change.
The Exchange’s proposals included introducing mandatory quarterly reports for Main Board issuers, containing, among other matters, certain key information, such as a condensed consolidated income statement, balance sheet and cash flow statement (each with comparatives) and a narrative business review. But there would be no mandatory audit or review requirement for quarterly reports.
With the requirement to report condensed income and balance sheet statements, the HKEx’s proposals would have been out of line with other major securities markets.
So, why consult on a condensed income and balance sheet statement? Was it a conspiracy? Had the Exchange somehow overlooked international developments? No. Rather, this was a deliberate attempt to address greater and more timely transparency on the HKEx. The attempt recognised that there is (relatively) less in Hong Kong of a culture of continuous disclosure of ad hoc price sensitive disclosure as exists in, say, the UK. The policy issue, it could be said, is that unless a culture of ad hoc disclosure were to blossom in Hong Kong, then quarterly reporting is something of a necessary burden. Whether this policy issue is right or wrong, the step of requiring quarterly condensed income and balance sheet statements would be a measure too far.
Will quarterly reporting (as its opponents often argue) lead to more short-termism, an obsession with quarter on quarter financial performance rather than sustained, long term growth? Not necessarily. This is an area where Hong Kong and the nature and profile of its market, its liquidity and investor base differs from other markets, resulting already in a very high degree of focus on short term financial performance.
Even so, quarterly reporting will be burdensome. And with this burden comes additional compliance costs, more regulation, more potential for listing rules breaches and more hassle.
By Charles Mayo and Henry Ong of Simmons & Simmons