No quarter given

AS CRISIS-inspired soul searching goes on, many fundamental planks of the governance landscape have been meditated on and yet more chapters of fresh regulation have sprung forth.

But there is one — modest – proposal on the table that finance directors might be thankful for. A draft directive from the European Commission (EC), seen by Financial Director, points to the Commission amending the 2007 Transparency Directive by removing the requirement for listed companies of any size to publish quarterly and interim management statements (IMS). Aimed at easing access for SMEs to regulated European markets, the EC believes the cost of putting quarterlies and interims together outweighs the value of these reports, and that reporting at the year-end and the half-year is sufficient to protect investors.

After mulling a separate disclosure regime for SMEs, the EC’s policy option is to abolish both requirements for all issuers, from the FTSE-100 to fledgling quoted companies. It will allow companies to voluntarily continue issuing IMSs “if there is strong demand from investors” and, according to the draft, the European Securities and Markets Authority will issue guidelines to specify what information should be included.

In any case, SME compliance is less than perfect. A 2009 Financial Services Authority study revealed around 5% of issuers failed to produce an IMS the first time it became a requirement, while companies in the FTSE Fledgling Index were the worst performers by market capitalisation, with just under 90% failing to file any IMSs at all.

That could be due to regulatory fatigue. Some think the pressure to do so produces superfluous reporting. “We see a lot of IMSs simply restating previously issued information, just because companies have to issue something,” James Godwin, head of regulation at junior stockmarket Plus tells Financial Director.

Chantal Hughes, spokesperson for EC commissioner for internal market and services Michel Barnier, confirmed that the commissioner hopes to make legislative recommendations on them early this November. Regulatory sources in the UK believe the draft accurately reflects what will become legislation.

In the UK, there are two clear camps of opinion over the change. While regulators and exchanges believe it is the wrong way to go, finance directors are gladdened to see someone removing a task of questionable value from their to-do lists.

Pim Vervaat, group FD at FTSE-250 plastic packaging manufacturer RPC, is happy to see the end of quarterly reports – although RPC just issues interims – and sees no argument in the cost to sub-FTSE-100 businesses.

“It is good to end the requirement. We keep our IMS relatively short; there is no extensive cost or effort involved,” he tells Financial Director. “I would have to sound out shareholders as to what their views would be if we discontinued the IMS, but I suspect they quite like a quarterly update.”

The FSA believes quarterlies and IMSs should remain in place as useful tools to control short-termism and maximise investor protection, citing a number of occasions when the publication of IMSs instigated “significant” share price movements. “They do have an impact on the market and thus investors’ decisions,” it says. “[The IMS] also serves an important role in reminding issuers of their obligation to provide regular information to investors. Similarly, the London Stock Exchange does not think the administrative cost is ‘a determining factor’ for SMEs accessing regulated European markets.”

Those speaking for the listed SME community agree those arguments are overdone – and that conversely, smaller businesses are actually the most in need of updating their investors more regularly.

“The smaller the company, the greater the perceived threat to investor protection, so regular information inbetween year-end and half-year is helpful. It is useful to know when something price-sensitive is happening; in the case of SMEs, that could be something as small as a conversation with a supplier,” says Godwin. “The prospects of small companies can change overnight and there is a danger of investors investing on the wrong terms if they don’t have access to that regular information anymore.”

As an Aim-listed business, Godwin says Plus is not required to issue either, but made the choice to publish IMSs in the fourth and 10th months of its financial year. He does not see any savings for SMEs in ending the requirements.

While Matthew Howes, a principal at The FD Centre, believes quarterlies and interims put “considerable” burden on smaller businesses, he suggests continuing as an internal exercise, rather than for publishable investor information.

“From an investor’s perspective, full reporting every quarter adds little firm information, so it’s a good thing to scrap it. It won’t affect governance,” Howes says.

“I don’t recommend using it for investor information. But detailed quarterly reporting is useful as an internal management tool, for looking at a broader strategic horizon. In that sense, it aids governance.” ?