The printed annual report remains as important a communications tool as ever despite the arrival of new technology with which to disseminate the corporate message
But today's wired investors are placing new demands on the printed document to ensure it adds real value to the investor relations program. Richard Carpenter reports on the changing nature of the hard copy annual report
The annual report is dead. Long live the annual report. Since the advent of widely available multimedia technology, a number of annual report pundits have predicted the demise of the hard copy annual report.
A few years back it was CD-Rom versions which had everyone talking. Then the Internet began to reach out to more desktops. You didn't even have to worry about mailing anything. A Web version of the annual could be accessed 24-hours a day from any time zone.
Yet, despite these innovations, the printed annual report remains as important as ever. Sure, a time may come when regulators move further away from the need for hard copy documentation as and when the Internet or other electronic communication becomes more a part of everyone's life.
But the lessons of the past few years underline the fact that people like using hard copy, printed information. That goes for annual reports as much as for newspapers and magazines. The printed annual report is far from dead. Indeed, the advent of multimedia alternatives have served to highlight its strengths - you can read it easily on the train; you can keep it on the bookshelf for easy reference.
Louis Thompson, president and CEO of the National Investor Relations Institute in the US, is in no doubt of the continued importance of the document. He notes it is still the corporate document most used by the investment community. 'Despite all the technology, investors still want a hard copy annual report which they can flick through. Companies need to package communications in a way that saves investors time and causes them to focus on the things which really drive the company.'
Investors are beginning to expect the best of both worlds, however: the accessibility of annual report information online and the availability of the main document for reference. Online information puts pressure on the printed version to really come up to scratch; it must now entice the reader with the depth and presentation of information, while making it really worth the wait for delivery by snail mail.
Retained Value
What does that mean for the printed annual report? Those in the investment community surveyed for this article point to some key factors. First, the printed annual has become more crucial as a bedrock of statutory reference and explanation for professional investors rather than a true market mover. That in no way diminishes its value as a primary source of information.
Next, it should work towards improving the transparency of a company, disclosing more information on how the company operates, its key value drivers and the risks which lay behind its business. Finally, and most importantly, it should give some detailed indication of the strategic intent of the company.
Analysts and fund managers on both sides of the Atlantic - and particularly in the Asia Pacific region - complain that many annual reports lacked any real detail about where the company is going. Many annuals continue to pay little regard to strategic issues, opting to bury one or two lines within the chairman's statement rather than boldly stating where they want to go and, crucially, how they intend to get there. 'Getting management to make comprehensive and cohesive statements on strategy is very difficult,' says Peter Westlake at the Prudential in London. 'They should have to do it in an annual report - that's the place you should be able to find it.'
Pauline Weetman, professor of accounting and finance at Heriot-Watt University in Edinburgh, has done a number of surveys of annual reports over the past few years, focusing in particular on the development of the operating and financial review (OFR) within UK company reports. She believes that many UK companies have made a real effort in recent years to follow the guidelines laid down by the Accounting Standards Board when it recommended the OFR approach in 1993.
The area where many UK reports miss the mark is in forward-looking, strategic information. Weetman says her research indicates many companies were scared of being 'hostages to fortune'; they might say it in meetings but didn't want to back it up in print - particularly as that hard-copy was going to be floating around more than a year into the future. She notes that many companies prefer to rely on a cushion of uncertainty, often making bland statements such as: 'This has happened in the past and we expect it to continue.'
She awards the highest marks to reports that make a real effort to communicate what the future might hold for the business. Indeed, she says, the few companies that have included decent amounts of forward-looking information in the past seem to be getting better at it.
Taking up the notion of the annual report as a base for the communications stance of a company throughout the year, Weetman adds: 'The OFR should help make legitimate the conversations which the leading fund managers and analysts have with the company. The annual report will never be redundant because if the statutory part of the annual report wasn't there, there would be no bedrock of regulated reference.'
Bland Copy
Weetman believes that OFRs in the UK are beating the equivalent management's discussion & analysis section in US reports at communication values, citing much bland copy in the US versions. Others assert that there is a growing amount of strategic content included in many US reports whether it be in the MD&A, included in the chairman's letter or put into a separate section of its own. Coca-Cola's latest annual report is lauded by several as an excellent example of how to convey this type of information.
Doug Wolfe of Hawthorne Wolfe Prow, a St Louis, Missouri-based design agency, argues that US reports are definitely becoming much more focused on the future strategy of the company rather than relying on purely narrative themes.
That's partly caused by the online revolution: people have access to information much more quickly than they used to, which has helped shift the focus of the printed document. 'It's made it much more strategic,' he says. 'Thematic annual reports tended to be a bit on the light side. The thematic has been largely replaced by the strategic.'
However, the detail of strategic information included in a report still varies greatly from company to company in the US. Coke may well be a market leader in its strategic discussion but that's undoubtedly helped by its market leadership on the product site. Other companies remain reluctant to go into too much detail about strategic intent for the future. And the safe harbor legislation of two years ago has not helped allay those fears to any great extent. 'Companies are still relatively conservative about talking about specific points and remain cautious in many respects,' says Wolfe.
Bill Cahan, creative director at west coast-based design agency Cahan & Associates, says the problem is just as acute with Silicon Valley firms. He says many people expect hi-tech firms to be more open because of the reputation they have gained for innovation in their businesses. But the two don't necessarily go together.
'Our clients are no different from anyone else out there,' says Cahan. 'They're just as conservative as companies on the east coast. We have to help them understand and communicate what the company's vision is within the annual report.'
Cahan believes the explosion of information online and in other media means the hard copy annual really has to shape up to retain its relevance. 'There's a cacophony of information out there. When the annual report comes out it's old news so it need to be clear, simple and strategically sound. Now it's got to be more than just a financial document - it has to have a vision.'
Asian Concerns
That caution is certainly mirrored in many annual reports from Asia Pacific companies, where the trend is often against releasing any forward-looking information at all. Valerie Lee, public affairs manager at Kuala Lumpur-based Multi-Purpose Holdings Berhad, says that the fear of including any information which may be deemed as ramping the stock is very real. 'Whatever you say with respect to future operations has to be in very general terms,' she says, adding that the regulatory authorities strictly enforce rules relating to misleading forward-looking information.
Lee says the difficulty lies in treading the fine line between giving investors details of where the company is going and being sure to exclude any misleading information. She also expresses the concerns of many IROs across the globe as they attempt to make the documents more communicative: 'Sometimes from the communications side you can say what you want to do but the management may not want it done that way. You may have to work to change it slowly over a number of years.'
The lack of high level disclosure in the annual reports of many Asian companies is a real concern of many fund managers looking at the region. A recent survey by Gavin Anderson & Company quotes a Singapore-based fund manager who relies on a lot of hard legwork in an effort to bypass the problem. 'In terms of disclosure... Asian companies tend to tell you more directly than the annual report will,' he says. 'You have to have built up a relationship and get in the back of a taxi rather than pour over a Bloomberg machine.'
That's fine if the fund managers being targeted are located relatively close by in the region - a little more difficult if the funds you are after are cooped up in an office in London or New York. Paul Marriage, a director of Forrest International in Hong Kong, has these words of wisdom for those in the region: 'For Asian companies, overcoming the tyranny of distance has to be done with high levels of disclosure - a key part of that is in the annual report.'
Lee at Multi-Purpose Holdings Berhad is in no doubt that a detailed breakdown of operations by business line and sector is the only way to retain the interest of overseas investors. They demand it and it has to be in the annual report. 'It is absolutely vital. As a holding company, it's crucial to give a good breakdown of the figures with as much detail as possible.'
Global Issue
Improved disclosure and transparency are just as key in other regions, of course. US and European issuers have grown used to demands for more attention to be placed on what really drives the value of their companies, although this has often resulted in bland statements on a commitment to shareholder value. Again, the Coca-Cola report is a good example of what best practice can achieve in this regard.
Regulators are also stepping in to ensure that companies cannot hide the risks lying behind their operations. Witness FASB's diktat to bring derivatives onto the balance sheet and similar work by the International Accounting Standards Committee.
Corporate transparency is not just about communicating messages to the professional investment audience, however. UK design agencies report that summary financial reviews are gaining in popularity among their clients as a means of directing the story to private investors on a more targeted and cost-efficient basis. Companies are also looking to improve the amount of information they include to address the concerns of other stakeholders, such as the local community, environmental activists, customers and suppliers. 'Our platform in this is the need to be clear about the role of the annual report,' says Simon Lake at Addison in London. 'It can become a compromised document with confused messages.'
Catherine Samy, founding partner at rival agency Merchant, agrees with those sentiments and suggests that the annual 'doesn't have to tell everybody everything including every detail about the business.' That, she argues, isn't what real communication is about. 'It's better to say what is really driving the business, being more direct on the things that really matter and the issues that need to be addressed.'
Samy believes that annual report consultants have to face up to their responsibilities to help companies improve the communication of key messages. And that includes telling clients when they are trying to fudge the issues. 'The quality of how we argue our case to companies needs to improve,' she says. 'The resistance we get is in part a reflection of our worry about stepping out of line.'
Wider Audience
Although the production of summary financial statements specifically targeted at retail investors has gone out of favor in the US, Doug Wolfe at Hawthorne Wolfe Prow believes that US companies are also using their reports to talk to wider audiences than just the professional investment community. That's particularly true for many small and medium cap companies - and it's often key for previously larger concerns following the downsizings and spin-offs of the last few years. 'Smaller cap companies don't have as much of a budget and the report often becomes more of a general communications tool,' says Doug Wolfe. 'Broadening the target audience helps amortize the expense across departments. We try not to let them serve too many masters, though - and investors remain the key audience.'
Wolfe argues that another key change is that companies no longer assume their audience knows who they are and what they do. He suggests more space is now being devoted to an overall view of the company, the market position and the potential of its products and services.
Up to Speed
Whatever the changing structure and content of the printed annual report, the issue of timeliness in today's online world just will not go away. Printed annuals are still vital for potential investors viewing a company for the first time but those familiar with a corporate story will already be up to speed with results and other messages by the time the printed copy reaches their desk. Valerie Lee argues that for Malaysian companies, the earlier they can bring out their annual report after results are announced the higher their credibility with investors.
Even if the corporate calendar is speeded up, though, there will inevitably be an information gap in the weeks between results and the printed document hitting desks. Pauline Weetman at Heriot-Watt University notes the most communicative companies are increasingly including more of the explanatory background text from their annuals in their preliminary results announcements - thereby attempting to reduce the information gap. The printed annual then follows a few months down the road and develops the story in the preliminaries.
One report admired by the UK financial community is British Airways - it received an honorary mention in this magazine's 1997 poll of analysts and investors for IR awards. The BA report certainly seems to fit the model as a base of information released throughout the year, with a high level of disclosure and strategic content. BA also releases a fairly comprehensive preliminary statement to help with the timeliness issue.
Mitesh Kotecha, IR analyst at BA, explains the company has endeavored to make its financials as detailed as possible - always building and expanding on the level of disclosure in previous years.
'There's a great deal more disclosure in the numbers than is legally required. We also talk about where we're going and what we're trying to achieve,' he says. ' We go through our future goals in some depth. Analysts seem to find it a useful summary and it's consistent with what we talk to them about in meetings. It aims to convey a cohesive, consistent approach and strategy. We strive to make it a really useful document - but it's one of a family of useful documents released throughout the year.'
One of the world's leading active global asset managers has some firm views on what companies can do to improve their printed annual reports. Paul Moore, at Bankers Trust Funds Management, cuts straight to the point: 'Just tell us the way it is and where you're going. How do you run the business? The first thing you can do is fire all of the marketers. Don't dress it up with too many fancy pictures.'
The 'cut the pictures' call is a familiar cry from many in the financial community. But pictures and graphics can undoubtedly help to convey a company's story if used sensibly and creatively. Analysts and investors would probably be the first to complain if they received hundreds of plain, black and white reports with nothing to distinguish between them. They're only human, after all.
Strategic Concerns
Continental European annual reports are underperforming in their task of communicating key messages to the US and UK investment community. That's the finding from a recent survey of professional investors and analysts conducted by Yankelovich Partners for London-based design consultancy Pauffley.
The survey canvassed the views of 151 US and UK analysts and portfolio investors in June of this year and discovered that many continental European annual reports just did not come up to scratch. Areas of weakness highlighted by the respondents were a poor level of disclosure, a lack of a shareholder-oriented culture and reports being slow to appear. The failure to go into detailed explanation of strategy was noted time and again: 'After detailed financials, investment professionals want a clear explanation of strategy and evidence that it is delivering results.'
David Bickerton, managing director of Pauffley, thinks that the strategy issue is particularly important for today's printed annual reports. He warns that continental European reports don't necessarily have to follow a US or UK model. Indeed, he adds that many UK reports are still far too retrospective - 'too much rear-view mirror stuff' - to satisfy the demands of the financial community.
Bickerton favors either pulling out the strategic issues in a separately marked section in the report or - possibly more suited to a continental European approach - dealing regularly and specifically with strategic information throughout . The respondents to the survey suggested that a separate section in the report was the best way of dealing with the company's strategic intentions but nearly a third in the US and a fifth in the UK said that including it in the management letter to shareholders was OK. A lower number from each market believed that it could be integrated into the operations review.
Wherever the strategic coverage is placed in the report, the key message was that content is more important than the context. First and foremost, investors in the survey called for full, detailed disclosure of strategy and how it will be carried out. Next up they wanted proof that the strategy works or the results it achieves followed by an assessment against the competition or addressing the market position.
'There's often a corporate fear of being a hostage to fortune,' says Bickerton. 'But companies need to be clear about their strategy and prepared to set targets and say how they are going to achieve them.'
Now there's a challenge for the annual reports of the future.
Communicating Strategy in Annual Report
Full disclosure of strategy/detail/how it will be carried out | 42 | 23 |
Proof that strategy worked/results | 38 | 36 |
Assess against competition/address market position | 11 | 11 |
Financial history | 8 | 9 |
Advantages of the strategy/why strategy is best | 8 | 9 |
Explain it clearly and simply/no legalese, jargon | 7 | 17 |
Openness/be forthright | 4 | 7 |
In management letter | 4 | 5 |
Future direction | 1 | 8 |
Why targets not achieved | 1 | 7 |
Annual report not best way to do this/nothing | 3 | 8 |
Source: Pauffley
Time for a Drink
'Thirsty?' asks the branded front of Coca-Cola's latest annual report. 'Great! We are, too,' comes the response as you turn the cover. The thirst for growth theme continues throughout the book hammering home the message that, no matter how many Cokes are being drunk in the world today, there's still room for more to be consumed.
'The correlation bet-ween thirst as it related to the product and thirst as it related to the marketplace was pivotal to the report,' says Phillip Hamlett, vice president and director of creative services at Executive Arts in Atlanta which helped Coca-Cola design the report. He points out the driving objective of everyone working on the annual report at the company was to make it as engaging as possible to the reader. 'It's an overriding mandate from the client,' he says. 'Make the reader want to devour the whole report, to keep on reading.'
It's certainly a good read. The text is written in plain English and interspersed with jazzy illustrations which emphasize the message. Throughout, Coke uses its famous brands to help form charts and convey the seemingly endless possibilities for expansion of its business.
'The overall objective is to increase the confidence of investors in the company as a long-term investment,' says Cathy Dalrymple, managing editor of financial communications at Coca-Cola. 'It reports on the past but also tries to give a view on the future. We're trying to communicate our personality and our product throughout the report.'
Try this for a thought to leave investors with on the back cover of an annual: 'A billion hours ago...human life appeared on earth. A billion seconds ago...the Beatles changed music forever. A billion Coca-Colas ago...was yesterday morning. Our challenge: to make a billion Coca-Colas ago be this morning...Thirsty?'