Monday 30 January 2017

True and Fair: A View From the Boardroom #2

Accountability and Reporting

When a company is incorporated, there are at least three parties involved. The shareholders who invest their monies and assets into the company, directors who are elected as stewards of the company and management who are appointed by the directors to run the company's day to day business in achieving the objectives set by directors.

Shareholders can only exercise their power at the general meeting of the company. While the article of association may reserve some power to them especially in approving transactions involving substantial assets, most of the power of the company are vested with the directors. While  directors could delegate some of these power further to management, in most cases they are ultimately responsible for the conduct and affairs of the company. 

Public companies raise funds from the public to finance their business and growth. They issue prospectuses to convince future investors about their prospects. Most of the investors who are investing in public companies are pure investors and have no ability to influence and know its activities unless information is provided by the companies. Hence, it is a fair expectation that they provides their investors with true and fair financial statements to enable their performance to be judged and financial positions assessed.

The principle is crystallised in the Companies Act, the Capital Market Services Act and the Financial Services Act, amongst others. Not only these laws require the tabling of financial statements but it must also be audited by independent auditors. Directors, who are responsible over the affairs of companies and the utilisations of their assets, are required to prepare financial statements which comply with financial reporting standards and provide a true and fair views of performance and financial affairs.

For companies which are listed on stock exchanges, their share are traded on a daily basis. In most cases their share prices reflect their future prospects. This is the reason why for some companies the value of their shares are above the values of their net assets and some for some others, the values of their net assets exceed their share prices.

As investors who are not directors or management do not have first hand information of the plans and activities of listed companies which could affect their prospects, it is very important for companies to share those information with the market on a timely basis. This is to enable existing and prospective shareholders to make decisions in buying and selling the shares of listed companies on equal footing. Otherwise, those who are privy to such information would have an edge over others. This is the principle behind the requirement of stock exchanges requiring listed companies to announce material information on a timely basis.

Hence, directors are accountable on at least two fronts when it involves reporting, performance reporting and making material announcements. As companies could be large and having complex operations, it would be incumbent on the directors to ensure management have put in place systems and processes which would enable those two responsibilities to be met effectively.

This will be discussed in the next posting.

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