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Appropriate corporate disclosure is the foundation of stock market operations. A system to promptly provide important information must be maintained, to prevent changes in disclosure requirements from being perceived as a retreat from active disclosure.
The Financial Services Agency plans to abolish “quarterly securities reports,” which listed companies are required to disclose under the Financial Instruments and Exchange Law, and consolidate them into quarterly “earnings reports,” which are required of listed companies under stock exchange rules.
A bill to revise the legislation is expected to be submitted to the ordinary Diet session next year, with the revisions implemented in fiscal 2023 or later.
Although quarterly securities reports and earnings reports are formatted differently, much of their content overlaps. Some companies have spoken out about the heavy burden of producing separate documents every three months. The aim to reduce the burden of paperwork by unifying the two is understandable.
However, the contents of earnings reports are simpler than those of quarterly securities reports. If the information to be disclosed is reduced as a result of this unification, overseas investors and others may believe that this indicates a reluctance to disclose information.
Even after the revisions, important information included in the quarterly securities report should continue to be included in the earnings reports. The FSA is urged to closely examine the information required to be in the earnings reports, while hearing the opinions of a wide range of investors and other parties.
From the perspective of investor protection, it is also essential to ensure the reliability of the information.
The disclosure of quarterly securities reports was made legally mandatory based on lessons learned from the 2006 case of accounting fraud by Livedoor, and penalties were established for false statements. Quarterly earnings reports are only based on stock exchanges’ rules, and there are no legal penalties.
The unification of financial reports should not end up encouraging fraud.
The FSA has submitted a proposal to its expert panel that quarterly earnings reports should be regarded as extraordinary reports under the law and penalties be applied for false statements. The proposal must be discussed thoroughly to make it an effective system for deterring fraud.
Quarterly disclosure came under review as a signature policy of Prime Minister Fumio Kishida after he took office.
The purpose is to encourage companies to invest from a medium- to long-term perspective, rather than pursuing only short-term profits, and to achieve a “virtuous cycle of growth and distribution” through wage increases and other measures.
Initially, the abolition of quarterly disclosure was considered. However, the majority opinion on the FSA expert panel was that quarterly disclosure did not encourage companies to focus on short-term profits, and abolition was decided against. This is a reasonable decision.
In the medium to long term, it is important to improve the quality of information to disclosed. It is desirable to enhance information on decarbonization and investment in human resources. This will likely lead to sustainable corporate growth.
