4 September 2014

Zimbabwe: Firms Must Make Full Disclosures

TOP Companies Survey 2014's Judges Chairperson, Itai Chirume, has encouraged companies listed on the Zimbabwe Stock Exchange (ZSE) to make comprehensive financial and operating disclosures crucial in assisting investors as they interpret financial results. Most investors require significant amounts of information to make investment decisions but most listed companies are reluctant to release such information.

Effective information sharing with investors on both company business as well as sector relevant issues such as the operating environment, core competitiveness and potential risk remains a practical challenge. Chirume told delegates at the awards ceremony, which was sponsored by Old Mutual, that companies continued to withhold critical information, hindering fair assessment as investors and shareholders were forced to make decisions based on little information.

"It has become common practice that the average annual reports in Zimbabwe cries foul of liquidity issues and tough operating environment. So we did notice that the environment and liquidity constraints have imposed a general constaints that curtail growth among the listed companies. In our findings, in terms of company disclosures, the general observations were that companies disclose the barest minimum possible especially as prescribed by various regulators such as the Zimbabwe Stock Exchange listing rules, the Reserve Bank of Zimbabwe in terms of banks and Insurance and Pensions Commission (IPEC) in terms of insurers," said Chirume.

The ZSE is set to have new listing requirements before the end of the year as they push for more disclosures in line with modern trends. The current listing requirements were last revised in 1998. Chirume said companies appeared to have wide latitude in deciding what type of information to make available to the public; that selective disclosure has been a serious problem for investors because insiders would frequently take advantage of the information for their own gain at the expense of the general investing public.

"We saw a few exceptions where companies voluntarily offer more disclosures than what is prescribed and therefore those that were offering beyond the levels of prescribed disclosures actually scored better in those results. On a few commendable cases we have seen voluntary disclosures and we liked that. It is our desire to see an improvement in the quality of disclosures. Many do disclose directors interest and I am sure it's because auditors have been insisting that happens. But we are here to see more disclosures in terms of directors' direct interest as well as indirect interest held in the company but not only for the directors but also senior management in the company."

"The allocation of share options and other incentives ... It is standard to see that your company does run a share option scheme. We want to know what the participation is like. We believe a healthy balance can be struck between the costs of publishing your annual financial reports against the quality of disclosure. We are sensitive that in a difficult operating environment perhaps the cost factor could be an issue militating against quality of full disclosure but we think that even a small report could have adequate report."

The judging process was both qualitative and quantitative using various metrics which included environmental and sustainability issues, partnerships, corporate governance issues encompassing board independence, board composition, quality of disclosures at analysts briefings, frequency of trading updates and accessibility of directors/ management to investor enquiries.

The analysis also included earnings performance levels, size of market capitalisation and total assets, financial health and investor returns. General information is rarely sufficient on its own to fully capture a company's sectoral characteristics. The Securities and Exchange Commission of Zimbabwe has in the past expressed reservations over limited financial and operational disclosures, saying this made it difficult for investors to make informed decisions.

The current disclosure requirements for listed companies had many shortcomings and allowed abuse of minorities who often do not have an insight into key details regarding the management of their company. Disclosures would help improve the quality of their financial reports in order to attract foreign and local investments.

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