Transparency helps lure investors

PUBLISHED : Saturday, 23 June, 2007, 12:00am
UPDATED : Saturday, 23 June, 2007, 12:00am

Hong Kong companies have been making better use of narrative financial reporting to achieve greater corporate disclosure as part of an effort to attract the ever-growing pool of institutional investors in the city.

'More comprehensive disclosure in annual reports can definitely help attract investors because it shows the company is transparent and that the management really values investors and takes care of its shareholders. It is a gesture that can enhance the credibility of the company,' said Gary Sik Siu-kwan, managing director of DBS Asia Capital.

The narrative approach to financial reporting really took off following the Enron and WorldCom corporate debacles that rocked boardrooms to the core and forced regulators to implement tougher corporate governance and compliance regulations.

The annual report now acts as a platform for companies to strut their stuff to investors, in particular to institutional ones, who have the resources to meticulously comb through the fine print on each page to analyse the potential of a stock.

'Institutional investors are more demanding so companies are focusing more on their investor relations effort, and the annual report is an important part of that,' Mr Sik said.

China's staggering economic growth, the mushrooming wealth management industry, the launch of the Mandatory Provident Fund system in December 2000, and the trend of globalisation, have fuelled the rising number of institutional investors in Hong Kong.

They are eager to capture the rising demand for a wider product range from mutual funds to unit trusts, and to meet the growing desire of retail investors to diversify their portfolios.

The days of presenting a company's bottom line with basic facts and figures are long gone. European and American companies have led the way in accomplishing a greater degree of openness and transparency in their financial statements and reports.

Philip Chu Yin-kam, director of ARC Capital Partners, said: 'This is also an opportunity for directors to provide additional disclosure on the company's direction, strategies and management.'

The level of disclosure in the annual reports of listed companies in Hong Kong, however, still lags behind that of the west.

Mr Sik said: 'Less than half of listed companies have taken the broader approach of disclosure in financial reporting.

'Only the more sizeable Hong Kong listed companies make the effort to disclose information more fully.

'The annual reports of smaller companies that do not have much of an institutional following are still largely just numbers without too much explanation.'

And the fact that many major companies in Hong Kong are still family-run further exacerbates the disclosure process because such a decision is usually heavily guarded by family shareholders.

Frederick Tsang Sui-cheong, assistant general manager of China Everbright, said: 'There is reduced pressure on, and less incentive for, family-run companies to disclose information because family members are usually active in the running of the company and are also the main shareholders, so they already know what and how the company is doing versus cases where there is not one major shareholder and the shareholders aren't participating in the management of the company.'

If Hong Kong was to secure its position as one of the world's leading financial centres, it needed to do more to catch up with the global standard of financial reporting, Mr Tsang said.

'A lot of Hong Kong companies are comfortable in disclosing issues that are not controversial. For example, corporate governance, details about their operational past and old statistics on their business performance. But they are much more reluctant to talk about the future for fear of exposing information to their competitors and forecasting projections that they are unable to deliver on later,' Mr Tsang said.

Companies under pressure from shareholders to disclose more details about their future plans are walking a tightrope between offering inaccurate information and satisfying their investors.

Mr Sik said: 'Management has to be careful about crossing that line of presenting forecast information that could be misleading.'

Companies should focus on providing more information in areas such as market trends that could affect cost pressures, new acquisitions, the potential of new markets and giving indications of a change in product mix or market strategy, Mr Sik said.

'Most companies have the ability and resources to do this, but it just depends on whether they want to

do it.'

While institutional investors have welcomed more disclosure in companies' annual reports, the greatest benefit will most certainly be for retail investors who depend heavily on such information to analyse the potential of stocks on their own.

Mr Tsang said: 'Institutional investors at least tend to have the backing of analysis from sell-side analysts. But individual retail investors have to make judgment calls on their own so broader disclosure is a good thing for them.'

Rules of engagement

Hong Kong companies happy to disclose non-controversial issues

Will need to do more in order to secure standing as world's key financial centre

Companies with institutional investor following likely to disclose more

Financial reporting regulation could backfire

Peer pressure is likely to be more effective in long run