Skip to main content
Apr 30, 2002

Honey, I shrunk the annual

Companies are scaling back their annual reports

This year, Delta Air Lines decided the tone of its annual report should be subdued because of the catastrophic year the commercial airline industry had just experienced. It opted for a slimmed-down annual with mostly black and white photos and a direct, business-like approach to handling the company's recent challenges. 'We didn't want it to be glitzy with loads of color like last year,' says IRO Gail Grimmett. 'And cost was an issue given we were losing money.' Delta toyed with taking minimalism to its logical extreme and producing a 10K wrap, but ultimately it chose to produce a full-fledged annual report. 'As dismal a year as it was, we still had a story to tell,' says Grimmett.

Annual reports - which define a company's performance and set its strategic direction for the future - are far more faddish than most IROs care to admit. This year, as the business world reels from the demise of the dot-com boom, the events of September 11 and the Enron scandal, IROs are striving for a dignified, sober discussion of corporate results. Razzle-dazzle is out.

The Charles Schwab Corporation exemplifies the trend. In a sharp departure from the past, Schwab eschewed most color, publishing an almost entirely black and white book. It clearly aimed to project a prudent image and sense of fiscal responsibility.

Ditto PepsiCo, which in the past produced some unusual, eye-catching covers, including one with sumo wrestlers on it. This time, PepsiCo humanized its 2001 annual report by featuring children on its cover. Like other executives planning the annual, Elaine Palmer, PepsiCo's manager of corporate information, accepts the annual may have been subtly altered by world events. 'I can't say 9/11 didn't affect us, but it wasn't in a conscious way,' she notes.

Certainly the glitz and glam of good-times annuals are over, for now at least. 'In the past they were glossy productions that took up huge amounts of resources, but that's not what shareholders want right now,' says Shelley Black, Bank of Montreal's senior communications consultant. 'Shareholders want great disclosure and great information, but they don't want all the trimmings.' On its most recent cover, Bank of Montreal showcased employees at work, with the tag line, 'Everyone has plans.' Inside, it outlined its own plans in what Black describes as a 'very business-like, no-nonsense way.'

These trends may continue even after the recession. Designers who have been through several market cycles in their careers characterize the current economic downturn as harsher than past ones. As companies get used to the idea of subduing corporate ego and modestly telling their stories in pared-down books or 10K wraps, they sometimes find it hard to imagine returning to flamboyance.

Across the pond European companies - though typically hit less dramatically than their American counterparts - have also grown a little less showy. One designer in Amsterdam, for example, has certainly noticed a trend among clients towards more cautious annual report budgets. He puts this down to a combination of a need to make real cost savings and a desire to avoid appearing extravagant. 'Companies know not to produce such glossy reports when their results are poor,' he confirms. 'So they use less color, for instance, and less photography. They go for something a little more sober.'

In positioning terms, Anglo-Dutch household products giant Unilever opted in its new annual for 'somewhere in the middle of the spectrum', according to Andrea Gethin in the corporate relations department. 'We did look at something bright and brash this year but we decided it didn't reflect what we were trying to put across.'

A new forthrightness

In North America this year the changes in annual reports are not just the product of less impressive profits, or even losses. American IROs have had to consider how best to handle the tragic events of September 11 in their reports. PepsiCo's Palmer says her company may mention the terrorist attacks in the corporate responsibility section of its annual, noting its foundation's $5 mn special donation to the victims. Others avoided the subject altogether, focusing instead on themselves and the news generated by their companies.

But for some, the impact of September 11 was too significant to go unremarked. At Delta, says Grimmett, 'We were in a unique position. We had to talk about 9/11 directly. The aviation industry was shut down for four days.' She also notes that telling the story - with all its pain and challenges - is a way of emphasizing the Atlanta-based airline's strengths, since Delta's chairman Leo Mullen emerged as a spokesman for the industry.

Goodrich Corp, another aerospace company directly affected by world events, referred to September 11 without addressing it at undue length. Paul Gifford, vice president of investor relations, believes Goodrich would have published a similar 2001 annual had there been no terrorist attacks. 'There's so much in the media on 9/11, I wouldn't be surprised if some companies... just want to get on with getting on,' he suggests.

Ironically, companies outside the US saw it as imperative to address the terrorist attacks. 'September 11 was the most influential event of 2001. How can you not mention it in your annual report?' asks Black. In Bank of Montreal's annual, chairman Tony Comper writes, 'Before talking about the future... I feel compelled to briefly return to that unspeakable morning of September 11 when the world we thought we knew disintegrated, right in front of our horror-stricken eyes.' Comper personalized the tragedy, saying the bank had lost 'one of our own,' David Barkway of BMO Nesbitt Burns.

While very few companies bucked the trend toward restraint, Brown & Brown, the eighth largest independent US insurance brokerage, did project a camp exuberance that set it dramatically apart from the pack. The cover of its 2001 annual features a cheetah's head shaded in the red, white and blue of the American flag (the cheetah, which moves swiftly and ranges far, is the regional broker's corporate symbol). Ironically, says IRO Doug Hudson, the patriotic theme predated September 11. 'When 9/11 happened, we thought of dropping [the theme] because it might look like copy catting, but we said no, we're going forward with it because it's appropriate.'

Brown & Brown prides itself on its aggressive sales culture. The last year proved a bonanza and management saw no reason to be unduly modest. The print run increased from 15,000 to 20,000 and the design budget was kept the same as last year. 'We're tough guys, we like to think,' says Hudson. 'We're just as bold as in other years.'

Frugality chic

A sense of decorum wasn't the only thing driving companies to tone down the bluster and attitude. In a poor economy, IROs are concerned about pruning their budgets - and then trumpeting cost savings to shareholders. Report designers say it was common for companies to cut their annual report budgets by 25-33 percent.

Some of the winners of 2001 scaled back, too. Even those companies that did well don't want to be criticized for spending shareholder money unwisely, while those that had bad years economized as publicly as possible. 'There's nothing more frustrating to me, as an investor, than to receive a big glossy annual report from a company whose share price has just gone through the floor,' says Black, summing up a sentiment she believes many investors share.

For its 2001 annual report, Silicon Valley Bancshares cut its budget by 80 percent, according to Andrea Boscoe-McGhee, director and senior vice president of corporate communications. The bank reduced the size of the report considerably, eliminating pages of marketing materials it had formerly featured for new business prospects. The cuts were made to 'enhance branding,' not to convey bad news gracefully, she says, noting that 2001 was the bank's second best fiscal year in its 15-year history as a public company. Boscoe-McGhee maintains that the bank managed to save money while still boasting a hard-hitting format (the cover looks like the front page of a four-column newspaper).

Wrapping it up

Given that appearing frugal topped so many companies' lists of priorities, it's not surprising that many opted for 10K wraps. This year, Bowater, based in Greenville, South Carolina, produced its first ever 10K wrap.

For companies flirting with this idea, the fact that ExxonMobil produced its first summary report last year and Microsoft has now done 10K wraps for two years running made these non-traditional annuals acceptable.

Along with the 10K statement, Bowater published eight pages of statistical and other corporate information, according to Gordon Manuel, director of government affairs. Because many of Bowater's shareholders speak French, the 10K and supporting materials were in both French and English and around 45,000 copies were printed in total. Bowater seems sold on the 10K wrap concept. 'If the reaction is positive, as I expect it will be,' says Manuel, 'we'll do it again.'

The pros and cons of the 10K wrap are hotly contested, with most annual report designers (naturally enough) advising against them. At Delta, Grimmett worried a 10K wrap would diminish the airline's corporate brand. 'Delta still has a brand image out there,' she remarks. 'We thought that by doing a 10K wrap we might lose the branding.' What's more, for Delta a 10K wrap would have cost more than the traditional annual because the document can be so expensive to typeset. The streamlined annual finally produced - at 58 pages - cost 25 percent less than the prior year's book.

Another trend is for companies to publish summary annuals, which double as corporate brochures. For instance, this year and last, Bank of Montreal cut print costs by a third by producing two separate books: the first, a high-level corporate brochure surveying the state of the union for individual investors; the second, a black and white document printed on light stock that analyzes the financial nitty-gritty. All Bank of Montreal shareholders receive both documents, and employees can choose to receive the annual in either online or printed form.

For fiscal 2001 Gartner also produced a summary annual and sent shareholders a separate document with the detailed operational and financial data included in the traditional report. Hardly a slick corporate brochure, Gartner's summary annual was printed on thin paper and encased in a hard chipboard cover with the shareholder letter written on it. The effect was both extremely businesslike and visually arresting.

Lessons from Enron

Companies may talk of slashing budgets but the doorstop annual report is not an endangered species. In fact, another trend - towards increasingly thorough disclosure - means that some 2001 annuals are bulkier than ever. General Electric, for example, has been in the headlines over its beefed up reporting. This year's annual gives more detailed information about which businesses are included in GE Capital, with revenue and operating profit figures for 26 businesses as opposed to the twelve business segments formerly discussed. CEO Jeffrey Immelt has said, 'If the annual report or quarterly report has to be the size of the New York City phone book, that's life.'

Greater concern about disclosure is a worldwide phenomenon. IRO Toshihiko Onishi of Daiwa Securities in Tokyo says Japanese companies are increasingly interested in explaining their strategies and business plans in their annual reports. 'I think the level of disclosure is improving year by year,' he observes. Daiwa publishes 12,000 copies of its annual in Japanese and 10,000 in English.

Similarly, Tony Raza, IRO for Singaporean banking group DBS, says that its forthcoming report, though simpler in format, is beefed up with articles explaining company strategy, corporate governance and how it manages risk.

Some global companies feel they have a leg up, disclosure-wise. 'Being a global company, US Gaap is not good enough for us,' pronounces Ulla James, VP of investor relations at Nokia. The Finnish giant is listed on six exchanges so must meet the requirements of each. 'We can't even benchmark ourselves against the best US companies because they're not good enough for a global company,' she says. 'We have to make our own internal benchmarks.'

For smaller-cap and Canadian companies, a heightened emphasis on disclosure and fiscal responsibility comes as nothing new. Designers note that Canadian companies haven't had to pull back graphically or slash budgets because they've always been fairly frugal. Small caps are also adept at stretching a lean design budget. Maria Mitchell, IRO of San Diego-based WD-40 Company, notes that her small-cap concern has always tried to use its resources wisely. The 2001 annual is a compact book that looks like an owner's manual. 'We don't want our annual report to be flashy,' she says. 'We want to have lots of content.'

Global perspective

Historically, European companies have lagged behind their US counterparts when it comes to creating annual reports that talk strategically and address the future. Not so today. Some designers say the Europeans are at the forefront of an emerging trend - annuals that are stakeholder documents, measuring a company's impact on society and the way that affects its value in the marketplace. Social responsibility is now taken very seriously in the UK, for instance - so seriously that the environmental record is sometimes addressed in the chairman's letter. Gethin says one of the reasons for Unilever's less 'bright and brash' approach this year was its continuing concern about the environment. 'We wanted to use sustainable materials,' she notes, which precludes anything too glossy.

Increasingly, companies are thinking globally when they create their annuals. Nokia, which has nearly 2 mn shareholders, half in America, views its annual report as a global document (the master is produced in English and translated into Finnish). 'When we look at ourselves, it's a global view,' says James. 'September 11 and many other dramatic world events are part of us so we try to represent a balanced view.'

Being global can force a paradigm shift. Nokia's shareholder numbers are 'so vast that it's no longer a question of what grade of paper we use, or how many colors we put in the annual report, or how many pages. We're really against the wall thinking how we can serve our investor population in the best, most efficient way in terms of cost and timing. And when you enter a new world altogether, you start exploring the internet.'

The internet makes the annual much more timely and therefore more relevant, asserts James. Nokia would find it tough to complete and mail a full-color printed annual report substantially before its March 21 annual general meeting, but 'with the web, shareholders get it right away and there's guaranteed delivery,' says James.

The internet means that Nokia's annual can reach beneficial holders who are otherwise 'a very weak link' in the shareholder chain and may never receive the printed book at all, according to James. And although cost savings don't kick in immediately, the internet means Nokia can afford to go on expanding its shareholder base without incurring prohibitive incremental costs. What's more, Nokia can take advantage of the cutting edge extras available on the web, incorporating video streaming into its 2001 shareholder letter.

But making best use of the internet for annual report purposes isn't just a case of exploiting technology. It's also a matter of adopting a creative approach. Unilever's hard-copy annual this year has a row of tabs across the cover, indicating the different sections; and these are mirrored in the online version, except that with the latter you click on the tabs to go to the relevant section. 'We wanted to use a design that would work both electronically and in hard copy,' says Gethin. 'We want them to work in tandem with each other.'

Although many IROs are loath to explore new technologies in challenging economic and political times, transporting the annual report to the web may be the only option for a company taking the long view. 'If you can migrate shareholders to the online version, you can save a lot of your printing costs, and printing costs for most companies are the largest part of the annual report budget,' says Black of Bank of Montreal. 'In the next five years, I believe more and more people will want to receive their annuals online. They'll want to find out up-to-the-minute information, not just read something that comes out once a year.'