The ASX’s proposal to tighten earnings guidance is a piecemeal response that does nothing to protect the retail investor.
It maintains the lazy practice in Australia of financial reporting that has resulted in listed companies adopting inconsistent disclosure practices. The ASX proposal does nothing to create a formalised reporting regime that is consistent with overseas markets.
Rather than tinkering with the thought process around “market guidance”, which no one understands, the ASX should introduce mandatory quarterly reporting for ASX 200 companies.
This logical step would transform a market which constantly speculates on haphazard guidance and innuendo to one that is regularly updated with facts.
If the ASX did introduce quarterly reporting, the Australian market would not have the characteristics of the speculative casino that it presents as today.
Better still it might even encourage public companies to treat all their shareholders as owners and even consider quarterly dividends. What a novel idea in a world bereft of income and a country seeking regular income for pensioners.
Tinkering around the edges
In March, the ASX released a consultation paper outlining proposals to tighten earnings guidance. It follows the $1.2 million fine slapped on Newcrest Mining for its failure to comply with continuous disclosure obligations after analyst briefings.
One motivation for the ASX proposals is to discourage companies ‘manoeuvring’ analyst forecasts to avoid disclosure obligations.
On Monday, the Australasian Investor Relations Association (AIRA), the peak body for investor relations, criticised the proposals saying they would have the opposite impact to what the ASX intended.
AIRA said the changes would actually result in a less informed market and provide greater potential for earnings surprises.
That’s fine, but wouldn’t focussing on what’s actually happening — through quarterly reporting — rather than on forecasting, be a good start?
Risk of insider trading
Today as this debate evolves in Australia we are noting the updates on the quarterly profit performance of some of the world’s largest companies. For instance just this week we saw Apple, the world’s largest company, produce its quarterly result covering its worldwide operations – some $58 billion of sales.
Australian listed companies which are minute in comparison are not required to or claim it is too hard to do quarterly earnings reports. Really is it that hard?
So the market of Australia is indiscriminately driven by guidance and consensus earnings forecasts but not actual facts regarding the recent performance of the companies.
Yet every board of directors is now looking at the last quarter’s reports. Others eye the numbers as well. The risk of insider trading is enormous.
In the last few days, we have seen the start of the downgrade cycle for 2014/15 with MaxiTRANS and Hills, but that’s just two out of 2,500 companies on the Australian market. How much simpler if all companies had updated the market by the end of April?
Stacked against the average investor
In the next few weeks, brokers will hold both small-cap and large-cap conferences where many Australian corporates will be presenting. They will give updates at those conferences. They will also release presentation slides to the market. While a slide is interesting it doesn’t tell the whole story. A presentation with words is clearly different.
Clearly, and in spite of the ASX’s proposed tinkering, the regime will still be totally unfair for the average self-directed investor.
The information they receive is delayed; they don’t have private briefings (we think the ASX is particularly lax on private briefings); and they can’t go to conferences.
Quarterly updates to the whole market plus the non-trading of securities immediately prior to and during a teleconference would be other refinements that would help the integrity of markets.
Australia is decades behind the rest of the world on financial reporting to its markets. The ASX needs to come into the 21st century and insist the major companies, at least, produce quarterly reports.