Skip to main content
Sep 30, 2001

Full spectrum communication

What's wrong with annual reports and IR web sites

It would be easier to be cheery, but instead I'll be frank. I set out to find the pioneers of corporate reporting and discover how they differ from the masses. Specifically, I wanted to focus on cutting-edge IR web sites and annual reports. After all, there have been so many innovations, there are surely some savvy companies out there that have come up with the tools to give investors exactly the information they're looking for.

But then I began to do my research, and everything changed. Everyone I spoke with soon began to tell me about all the things companies are not doing right. Could it have been that I spoke only to pessimists? No, all the corporate reporting experts seemed equally eager to find companies that are exceptional at reporting. Yet they could not overlook the huge gap between what is and what could be. In the end I realized that when it comes to IR web sites and annual reports, the cup is definitely half empty.

Discovery #1: Investment professionals find IR web sites frustrating; they get a lot of their information from other sources.

Discovery #2: Investment professionals would use IR web sites more if they contained important and timely corporate information not found elsewhere.

Discovery #3: Investment professionals consider annual reports mostly worthless.

Discovery #4: Investment professionals consider annual reports on the web equally worthless.

Discovery #5: Investment professionals would value annual reports more if they focused less on the past and more on the future.

Discovery #6: Investment professionals want to see continuous reporting replace periodic reporting.

Hold on a minute

Let's begin with something everyone can agree on: what information is important. Take it from Robert Eccles, former Harvard Business School professor, head of Florida-based Advisory Capital Partners and a co-author of a new book published by PricewaterhouseCoopers, The Value Reporting Revolution. Eccles has been studying specific industries to find out what performance measures are important to analysts, investors and corporations themselves. Beginning with high-tech firms, he finds ten measures that all three groups agree are very important. 'Of that ten, three are financial (earnings, cash flow, and gross margins), while the rest are non-financial measures (things like competitive landscape, market share, market growth, speed to market, and quality and experience of management team),' he says.

According to Eccles, analysts and investors are generally satisfied with the financial information they get from companies, though they tend to be dissatisfied with everything else.

'We asked the companies how actively they're reporting these non-financials, and for just about every one of these measures they say they're not actively reporting them,' explains Eccles, who hopes to have finished studying his 20 target industries by the end of the current year. 'The other thing that is interesting from these surveys is that most companies think their shares are undervalued,' he adds.

In other words, corporations and investors agree on what information is important, companies fail to report most of the information investors need, and companies complain they are undervalued.

The first problem with corporate reporting is its unbalanced focus on financial information. Numbers are important, but they tell only part of the story.

Straight from the horse's portal

David Kidwell, client services director of Citigate Marchcom, has a habit of studying corporate reporting, and he's quick to point out the shortcomings of IR web sites. 'Until recently, people's idea of a corporate IR web site was to take data-feed information and put it up on the web and think, That's fine. But all the professional investors have that information already. They don't rely on the corporate web site for past historical information. They get up-to-the-second information through various proprietary systems all coming to their desktop. What they want to find out is much more information upon which they can base an investment over the next two or three years, if anyone is brave enough to look that far ahead.'

The Association for Investment Management and Research (AIMR), whose members are mostly fund managers and analysts, has conducted two surveys that give this claim some support. In 1998 and then again at the end of 2000, the industry group polled its members to find out how they use IR sites. The surveys found that use of web sites is falling. During the two years between surveys, the number of people who log on to IR sites at least once a month dropped from 41 percent to 28 percent. The number of people who access IR sites quarterly or less often grew from 24 to 41 percent, and the number of people who no longer visit IR sites at all grew from zero to 3 percent.

AIMR's head of public communications, Rich Wyler, says he was surprised by the findings. 'The only thing that we could conclude was that in 1998 web sites were newer; people were checking them out more frequently to see what companies were doing with their sites. And by late 2000, when we did the second survey, people were familiar with what was available and what wasn't. Those 41 percent [who log on once a quarter or less] are probably saying there isn't a great deal of value on the sites they follow, so they don't need to log on very often. It's not someplace they go to for regular information.'

The surveys reflect the frustrations of AIMR members. The biggest problems with IR sites, they say, are incomplete information, out-of-date information, insufficient historical information and difficulty finding desired information.

The Nielsen Norman Group decided to see for itself how easy it would be to get basic information from corporate sites. It gave a group of journalists the task of writing an article about 10 different companies based on information their sites contained. The test, which looked at Fidelity, Merck, Wal-Mart, Nokia, Philip Morris, Benetton and others, found that each site had what Jakob Nielsen, principle of the Nielsen Norman Group, calls 'usability problems.'

'We got a success rate of 60 percent,' Nielsen explains. 'In other words, 60 percent of the time they were capable of getting the information; 40 percent of the time they couldn't even find it.'

Nielsen says perhaps the word 'success' is a little misleading because it doesn't mean that 60 percent of the time the web sites were great. 'It means it was possible for a person - a professional information seeker who has enough stamina - to actually get the information.' Still, at some point in every single test session, journalists said that they would have to leave the site because it failed to deliver what they needed.

Nielsen says the users' inability to find information had a strong impact on their impression of a site and thus on the way they perceive the company. 'Also, even in these cases when the journalists could actually find the information in the end, they often got a very negative impression of the company while proceeding through the task. So on the PR side, it doesn't put the company in a positive light if it's very difficult for the audience to get the answers to their basic questions.'

Nielsen points to BMW's site, for instance, which he says is 'so glitzy and glamorous that they don't dare to stand up and say, Here are our cars - if you want some information about our cars click here. There's so much overlay of glamorous design that you don't get the basics.'

Wyler says AIMR's surveys rated corporate IR sites as average, at best. 'I'm left to wonder if the companies are not really looking at their web sites as a source of strategic financial information and are therefore not focused on it. Also, some of these sites may have so much corporate spin that they are less valuable as a source of unbiased information,' he observes.

Tell me something I don't know

When it comes to annual reports, the picture is bleaker still. Gene Mayer, principal and creative director of Gene Mayer Associates, believes the time-honored documents now run the risk of becoming completely irrelevant for portfolio managers and analysts. He didn't always feel this way, though his views began to change while interviewing equity analysts to determine their usage of annual reports.

'Without question, they all said that they don't really rely on the annual report as a source,' Mayer remarks. 'In fact, when I asked them if they looked at the annual reports of the top four or five corporations in the industry they cover, most of them said they hadn't even looked at them.'

The annual report suffers from the same problems as the corporate web site. They both tend to contain information that is incomplete, stale and covered with PR gloss. Meanwhile, Mayer says, analysts literally have at their fingertips much of what they need to build statistical profiles with conference calls, direct access to corporate executives and real-time data from third-party sources - what could they possibly get from annuals that they don't already know? Mayer quotes one of the many skeptical analysts he interviewed: 'Annual reports were never particularly useful. Now they're completely worthless.'

This is sad news for most investor relations people, who labor over their annual reports for months.

Furthermore, annual reports on the web have been slow to come into their own. According to a recent study by Thomson Financial/Carson, most companies who put their annual online merely do so as a PDF (Adobe Acrobat) file.

Kara Newman, Thomson Financial/ Carson's vice president of strategic research, says companies use PDFs because they are easy to create. 'You don't have to do any additional layout work to do a PDF. You don't have to hire a multimedia staff or a webmaster or a design team, which you would have to do with an HTML file. It's a pretty big job.'

True, they are printer-friendly - if web audiences want to print a PDF annual report it'll come out looking like the original hard-copy document. But Nielsen says this is the only advantage PDFs give readers. 'It's a common mistake for companies to re-purpose their annual reports and put them on web sites as big PDF files. When you do that you lose a lot of the ability to easily navigate and search and move around web pages, because you get this all-or-nothing, big chunk of data.'

Proof in the pudding

As always, investors will continue to go to whatever source gives them the best, most timely information. If a company's reports paint the definitive corporate portrait, investors will seek them out. Reports have to strike a balance: too little information and the company risks being seen as tight-lipped and opaque; too much information and it risks burying what's important under a mountain of minutiae. Increasingly, it's not the volume of information that resonates with shareholders, it's the information's quality and relevance.

How should companies determine what information they report? 'I think the first thing they can do is to ask themselves, If I was investing in this company, what would I want to know?' Kidwell suggests. 'Or even, What information do I need to run this company? Because in order to make an investment decision in the company, you have to know almost as much as the CEO.'

Baruch Lev, a New York University professor and author of the recently published book Intangibles: Management, Measurement and Reporting, believes that different types of information are important in different industries. Companies face the challenge of understanding what information their industry considers valuable. 'For example, many pharmaceutical companies provide detailed information on the product pipeline, which is very important,' says Lev. 'If you think about Pfizer and Merck, I'm sure that both of them have the same physical assets. They don't get any competitive advantage from the facilities. They get a competitive advantage from the people, from the processes, the patents, and the ability to get a drug quickly through the regulatory process.'

There are good examples of companies out there that are explaining how they fit into their industry-specific measures on the internet. British Airways ( releases monthly traffic statistics reports on the third working day of each month. Philip Morris ( talks about the legal climate of the tobacco industry. Cookson (, which manufactures equipment for steel refineries, offers virtual tours of the refinery floors. Several real estate companies have begun to do the same for their properties.

Mayer says that beyond communicating information about the competitive landscape, companies must clearly define their leaders' vision. There's no better place to do this than in the annual report chairman's letter. After all, this gives investors a unique insight, which they cannot get from third-party sources.

From the gut

General Electric's outgoing chairman Jack Welch's letters are great examples ( 'I think Jack's letters have been phenomenal,' Mayer suggests. 'If you go back and look historically through those letters, you will see he's very up-front with the performance issues. He talks about what the company has done, what they've accomplished, what their goals are for next year, and then the following year he reports back. If they missed what they had set out to do, he'll tell you they missed it. If they exceeded it, he'll tell you they exceeded it.'

Another good example is Berkshire Hathaway chairman Warren Buffett's famed annual report letters, which are written in a frank, straight-ahead, no-nonsense tone. ( 'It has no photos, no graphs or charts or anything very flashy or fancy,' a Berkshire spokesperson says of the company's report, which flies in the face of all the glossy, airbrushed annuals out there. It also shows the world that it doesn't take a small army to put together an effective report. 'Really, it's Warren Buffett and [CFO and treasurer] Marc Hamburg who put it together.'

David Kidwell says the reason professional investors don't get much out of corporate reports is because the important information just hasn't been available.

'So what corporates need to do is rely on their reports to be able to provide correct information,' he says. 'And if the information there is correct, if it is timely, if it is appropriate, then people will start to go and use them more frequently.'

That half-empty corporate reporting cup may be slowly filling up.

Does this thing work?
Tips for improving your corporate web site:
First, conduct an internal audit. Take a hard look at your site to see if it contains the information investors want. Keep an open dialog with your investor audiences to determine what information they want to see. According to AIMR's survey on disclosure technology, some areas where companies could make quick improvements are: transcripts, slides and webcasts of past presentations, as well as downloadable data and links to analyst research. Continually update information. Keep it fresh and relevant.
'The IR site really needs to be managed as a separate site with separate users who have separate needs. If it's managed by the same people who manage the consumer site or by the IT department, then it's not going to meet investor needs,' predicts AIMR's head of public communications, Rich Wyler.
Next, take a hard look at your site to determine how easy it is to navigate. The most important information should be at the forefront. If someone arrives at your home page, they should be able to find what they need in just a few clicks.
The Nielsen Norman Group's Jakob Nielsen says, 'One of our recommendations is just to keep it simple. Focus on giving the information and don't bury it in huge multimedia files and PDF files, which cause problems for many of the users.'