An annual report roadmap

It seems to be the singular fate of the annual report to inspire controversy. In any given year, it’s possible to find an expert willing to pronounce the annual report dead in the water while another argues vehemently that it’s more vital and relevant than ever. Viewed as everything from the single most important form of shareholder communication to the CEO’s calling card, the annual report is many things to many different public companies.

Who is responsible for the annual report also depends on which company you ask. This much, however, is clear: many corporate secretaries are closely involved in the process, reviewing and contributing information to the enterprise. The most recent statistics available on whether corporate secretaries are involved in the annual report process come from the American Society of Corporate Secretaries’ (ASCS) survey in 2000; the survey of 647 corporate secretaries revealed that 28 percent prepare and/or distribute annual reports. Only 36 percent said this duty does not apply to them.

Things may have moved on from then. Although the corporate secretary is not actually dreaming up the theme for next year’s book, he or she might be instrumental in overseeing the process, says James Roop, president of Roop & Co, a Cleveland, Ohio-based company that designs annuals. ‘The corporate secretary is usually involved in providing a read and review,’ he explains. ‘But outside legal counsel is very involved, and he or she is working for the corporate secretary. Are corporate secretaries personally doing the work? Not necessarily. But are they paying for it and personally overseeing it? The answer would be ‘yes’.’ 

Following the trends

Heightened attention to all forms of corporate disclosure detail has led to an expanded annual report. According to Scott Greenberg, president of Curran & Connors, which designs 320 annual reports a year, the number of pages definitely rose in 2003. 

Eliott Saltzman, managing director of annual reports for creative services company Addison, believes the increased focus on the financial section ‘has catapulted the annual report to a level of importance that it hasn’t seen in quite a while.’ 

Greenberg notes that fatter annual reports are not only the result of longer financial sections, but also derive from more narrative pages. In 2003 many companies expanded their review of operations and other non-regulatory portions of the annual report, adding information on the competitive landscape, market share and segmentation. Greenberg argues that this renewed interest in storytelling can be attributed to the death of analyst coverage in the US. He says the annual report ‘remains the only SEC-required document that allows for editorial comment.’ This makes it a precious opportunity to explain why your stock deserves a superior valuation going forward. 

Some trends have led observers to doubt the relevance of the annual report, especially in an age when up-to-date financial information is readily available online. As Greenberg points out, ‘No shareholder in America is waiting for the annual report to arrive on the doorstep to find out whether IBM made money last year.’ 

Roop faults annual reports for being cutesy at the expense of meaningful communication. Without sufficient substance, it’s clear the whole annual report enterprise will likely be ignored. The question now is whether companies can leave behind the relentless optimism and formulaic photos that characterize annuals and tell their stories in a way that gives shareholders real insight into a company’s value drivers and its future prospects. 

Planning for the annual

Designers agree one place where public companies need to spend more time is the management’s discussion and analysis (MD&A) section. On December 29, 2003 the SEC distributed an interpretive guidance memo on MD&As, suggesting there’s too much boilerplate text and insufficient analysis. Saltzman is convinced that, within the next two to three years, the SEC will mandate the use of plain English in the annual report just as it did with prospectuses. Such a change would be welcome, he says. ‘I have difficulty reading the MD&As and I’ve been doing this for 20 years,’ he notes. 

Specifically, the SEC is seeking more information on known trends, as well as uncertainties or other factors that should be disclosed but often aren’t. These changes are not merely cosmetic but should arise out of a genuine rethinking and rewriting process. ‘It’s like chrome-plating a derelict car,’ observes Saltzman. ‘You can’t just add nice design – good hierarchy and headlines – without doing a plain English rewrite.’ 

Another area in desperate need of a makeover is the online annual. Dominic Jones, president of Clarity! Communications, an IR consultant company based in Toronto, Canada, says many companies today forgo HTML online annuals for far cheaper PDFs, which he calls ‘an extremely unfriendly format’. 

The online annual has fallen prey to a catch-22. If companies produced innovative online annuals, shareholders might skip the print versions, saving the firm money down the road. But without the cost savings of a reduced print run, most companies are simply unable to justify an investment in online experiments. 

Jones believes public companies will ultimately save money if they invest the necessary time and money in creating user-friendly online summaries. He suggests this would be relatively easy to do, given the ability to provide links on the web. ‘In the paper report, the financials make no sense unless you read them in conjunction with the notes and the MD&A,’ Jones points out. ‘You really need management’s insight into the numbers and what they mean, and you really need the accounting policies that were used to arrive at the numbers. In paper, that means you have to flip back between the three sections. On the web you can provide links from the financial statements to the notes and the MD&A. The [relevant] note can pop up in a new window.’ 

Rethinking the online annual report, though, would require some real soul-searching. Jones maintains the online annual shouldn’t be a marketing document, but rather a reference tool. ‘It’s what people turn to when they need information and facts – the numbers or the accounting policies,’ he says. As examples of companies producing interesting online annuals, Jones lists Duke Energy, General Electric, Aflac, adidas-Salomon and Centrica. 

Roop argues for making annual reports clearer and more informative. ‘I’d like to see more adherence to good, basic communications principles,’ he says. ‘You should tell the same story three different ways: through the words, through the pictures and through the captions. And everything should reinforce the key messages the company is trying to get across.’ 

Whether in print or on the web, an annual report is meaningful only if it effectively communicates with its audience. As Wall Street analysts continue to drop coverage of all but the largest companies, this issue is one that demands greater attention. ‘For many companies,’ concludes Greenberg,’ the annual report is no longer the best place to tell their story – it’s the only place.’