We firmly believe that listed companies can do better in terms of accuracy, fairness and completeness of disclosures, in particular in the management discussion and analysis (MD&A) section of the annual report, which represents the core of the non-financial information disclosure. The focus of our disclosure improvement effort is to get listed companies to present to investors clearly and effectively industry developments and trends, and the company’s corresponding measures, strategies, operational plans, and so on.
During the reporting period for 2011 annual reports, the Shanghai Stock Exchange (SSE) set out the requirements and key reminders for preparing the MD&A. Financial reports focus on past performance and historical information, while the MD&A puts more emphasis on the future. Forward-looking information should be complete, effective and fair, as well as tailored, specific and proactive.
Currently, disclosures in annual reports tend to be boilerplate and lack real substance. Material information that is truly beneficial to investors’ decision-making is often concealed. To improve the relevance and effectiveness of disclosure, we encourage more tailored information. Companies should customise and adapt to the requirements based on their circumstances and the principle of materiality.
The focus of information disclosure varies between industry. Companies should take into account their industry, their scale of operation and their market in tailoring what they disclose. In essence, this helps to achieve fairness in the disclosures.
Over-regulation in disclosure requirements results in broad, overly specific disclosures. Management spends huge amounts of time and resources compiling periodic reports, and is discouraged from voluntarily disclosing other information, which may be more relevant. It is for this reason that we set up a corporate governance forum and introduced an award for corporate disclosure.
Companies should drive the improvement to narrative disclosures from their MD&A. We hope listed companies will go beyond completeness, efficacy and fairness and strive for tailored and more specific information.
It is not an easy task to evolve from the existing boilerplate-type of disclosures and the SSE will help guide companies through this long journey. We hope to strengthen cooperation across different sectors of society and work with all parties to promote further improvement in corporate disclosures.
This artcile first appeared in Accountancy Futures, Edition 6, 2013