Technology has changed the way companies present themselves to shareholders
One of the most entertaining aspects of writing an article on the development of the annual report is getting hold of some of the documents from the 1970s. They provide photographic confirmation that even the world's leading chief executives fell victim to the wacky ties, wide lapels, flares and flowing locks which characterised the decade. Something those CEOs might prefer to forget.
The downside is that the office becomes swamped with a plethora of documents from every corporate design agency which knows you are writing the feature. Movement of anything on my desk risks causing a catastrophic domino effect as the piles of glossy reports tumble onto those already stacked on the floor. One begins to wonder how analysts and fund managers cope.
Despite the problem of being hemmed in by wobbling towers of corporate literature, the arrival of so many reports does in itself point to a significant development. The annual report market - in North America and the UK, at least - has become extremely competitive. Design agencies are clambering over each other to secure the deals which can mean the difference between boom or bust in the wake of the world recession. Look at the number of designers which commission expensive 'academic' research to prove to their clients their commitment to, and knowledge of, the annual report market. The pile of such research sitting next to my desk has almost reached the toppling proportions of its study group. Needless to say, most of the research conveniently concludes that there are problems with today's annual reports, but that ''X design agency can sort these problems out at a lower fee than its competitors.
Gone are the days when companies chose a design agency and stuck with it year in, year out to develop a consistent theme. Even the most trusted designers, which have built up relationships over a long period with their corporate clients, are now being subjected to beauty contests and free pitches in a bid to retain work. Indeed, recent research by the Jenkins Group in London suggests that free pitching is widespread and on the increase. This implies that designers are being asked to tout for annual report contracts with only a superficial understanding of the company, despite the desire from companies for closer working relationships and understanding with their consultants.
Even if the contract is secured, there is no guarantee of stability. Those that secure a three year run or more are among the lucky - or talented - few. Companies want more from their annual reports these days, but they want to pay less for the privilege.
To say that the annual report market has been led from the US would be an understatement. Trend after trend originating there has been adopted in the UK within a few years before being followed by other countries, as the clamour for information has developed in other markets. This holds true for virtually all aspects of the annual report - from the introduction of photography and graphics to the method of financial reporting and the use of technology in production and delivery.
IBM's 1955 document is often cited as the first example of the modern day annual report. It was not seen as a ground-breaker in terms of the information it included, but it did significantly change the way that information was presented. IBM hired leading graphic designer Paul Rand to put the report together, breaking with its tradition of a 20-page, plain bound document and replacing it with high quality photography and well-balanced typography.
Although IBM's report heralded a change, there was no immediate stampede by fellow corporates to follow. Several did so in subsequent years, but at the end of the 1960s there were still plenty of text-only, statutory-based documents being produced. Michael Watras, now of New York design agency Straightline International, says that up to the end of the 1960s there remained a large number of reports which were first and foremost legal documents written by the CFO and the legal department. Illustration with graphics or photos had not taken off in a big way, although many US companies made up for that in the 1970s and 1980s. Watras points out that, at the time, IR was virtually non-existent and that the development of the annual report in later years coincided with the creation of a whole new way of communicating with shareholders.
Matt Phelan of Atlanta-based Annual Reports Inc shares that view, arguing that the bottom-line reason for the evolution of the annual report into the type of document that we see today has been the proliferation of publicly-held companies and the concurrent move towards institutional holdings. He points out that the number of listed US companies has more than doubled over the past 20-25 years and the number of mutual funds has more than tripled over the same period. The result is much more intense competition for capital and the need to communicate with a more sophisticated shareholding community. Annual reports have advanced accordingly and their messages have had to become more finely tuned to the relevant audiences.
Let's go back a couple of decades to bring some international perspectives in here. By the mid-1970s the major US companies had pretty much all switched onto the idea of farming their reports out to design companies. Many now included photos and graphics to make the front end of the reports pleasing to the eye and of interest to shareholders and other audiences. Reports had become more than just a statement of the year's activities, as companies began to think of them in terms of marketing and brand identity as well. 'We were saying that if the book costs two, three or four dollars per copy to produce, why not make it do more than just communicate with shareholders,' says Watras. 'It can be used for marketing, advertising, recruiting and PR. And why not print it in several languages as well?'
Meanwhile, on the other side of the Atlantic, the cultural divide was as evident as ever. Most UK companies were still producing the 20-page statutory document that IBM had abandoned 20 years earlier and which even the most conservative of US companies had dumped by this time. Retailer Marks & Spencer, for instance, produced a 20-page text-only document in 1974 which stuck to the letter of the legal requirements, making no attempt to sell its story to shareholders and giving no strategic overview of the company.
That is not to single out Marks & Spencer for criticism. As Nick Glanvill of London design consultants Pauffley & Co points out, that was the norm for the times and all were still telling a very retrospective story. Those companies who chose to experiment with photos and graphics kept them simple and to the point: this is our new plant; these are our new developments; there are some of our products being delivered in one of our lorries. Glanvill says that the nearest equivalent in today's terms to the type of reports which prevailed in the UK in the mid-1970s are prospectuses for new issues. Anyone who has taken the trouble to pore over one of these documents will know that they are not typically a sight for sore eyes.
In the UK then, the move towards user-friendly annual reports only began to take off at the beginning of the 1980s, although some consultants, such as Michael Peters, had been producing US-style reports before the turn of the decade.
But when the change did come in the UK, the 'me too' idea hit hard and companies approached designers in droves with the 'make it look American' brief. Glanvill says it's hard to pinpoint the exact reason for the change of heart in the UK, but it was strongly linked to factors like the growth of international business, PR companies coming of age, the government's privatisation programme and, as in the States, the growing need for clear messages to meet the increased competition for capital.
These moves have been repeated in other markets as they, too, have experienced the growth of international business. And there is undoubtedly a close correlation between the spread of the investor relations function and the production of high quality reports.
Glanvill estimates that 75 per cent of listed companies in continental Europe still produce their annual reports in- house, liaising directly with the printers rather than through a design agency. But this is changing fast. Indeed, the larger companies which have been forced to put more resources and effort into their annuals in response to international competition have produced widely-acclaimed reports - Nokia and Ciba are two good examples - and have almost jumped a generation by gaining from the learning experience of the US and the UK.
Philippe Cornez of Omnium Consulting Corp in Paris points to the fact that most French companies - listed or unlisted - produce high quality annual reports despite not being obliged to do so by statute. And with over 35 per cent of the French market held by foreign shareholders many of those companies produce at least one foreign language version, something which continues to be lacking in the anglo-centric UK and US.
Talk to most annual report designers worth their salt about the mid to late-1980s and their eyes will glaze over with fond recollections of the out-of-control budgets and the joy of being chased for business, rather than vice versa. This was the hey-day of the all-singing, all-dancing annual report. Earnings per share were moving relentlessly up (or so it seemed) and companies wanted to tell the world - and their shareholders - that these were the good times.
Watras recalls commissioning the carving of a four foot high wooden tomato plant for the front cover of 1984 Heinz annual report and then using the tomato theme throughout in somewhat abstract imagery to represent the company's activities. 'That really was too much,' concedes Watras. 'Those days are gone. Whether they'll come back or not is another matter. Companies were saying, We're more than just a company, we're corporate citizens. Our figures speak for themselves - we'll have fun. Today very few annual reports are as frivolous. It's down to business and all clients take the writing of reports much more seriously.'
Certainly, the Heinz tomato report is seen as epitomising the point when it had all gone too far. But, as Matt Phelan says, it would be wrong to suggest that all reports during this period went to such excess. 'You have to remember you're talking about the exceptions rather than the rule,' notes Phelan. 'For the most part the appeal of such reports is to the ego of the individual running the company. The truth is you don't sell such a report to the average CEO. There's more accounting for what companies want the annual report to do in today's environment. And the answers have to be more realistic. Companies want to know what it's going to do to the price/earnings multiple of their stock.'
David Ritsema of London design consultancy Radley Yeldar notes that annual report budgets are heavily linked to the business cycle. But he believes that a return to the excesses of the late-1980s is unlikely. 'Design was on a high and the annual reports reflected that,' says Ritsema. 'Everyone was doing well and there was a degree of confidence which surrounded it. When the recession hit there was an immediate reining back as companies which weren't doing so well didn't want to be seen as too flashy. We won't ever go back to that extravagance. Everyone's become far more cost-conscious.'
EuroDisney's 1993 annual report provides an example of an entertainment company which has been consumed with humility following a major financial restructuring. It is simple, straightforward and a clear sign of the times. There's not even a picture on the front cover. The only concession to the fun side of its business is in the small monographs of cartoon characters in the bottom corner of each page. 'Today, I find myself in the difficult position of delivering unwelcome news,' begins Philippe Bourguignon in his chairman's statement. Even Donald Duck seems to have stopped laughing.
'Companies are no longer saying, This has been a bad year. How the hell are we going to hide it in the annual report?,' says Terry Tyrrell of Sampson Tyrrell in London. 'This is the era of transparency and companies have been forced to recognise that transparency in their annual reports.'
David Stewart, chairman of Addison Inc in New York agrees, adding: 'We live in a world where perception is reality. If you're perceived to be tightening the belt then the annual report is the way to show it. Companies have been in love with excessive honesty for the past five years.'
Of course, that doesn't mean all annual reports have become drab, dour documents. Far from it. For a bit of light relief look no further than PepsiCo's annuals of the past few years. Each front cover sets the tone for a theme which is then developed throughout the report: babies in corporate jumpsuits to represent 'forever young' (1989); a group of rabbits indicating 'a strong inclination to multiply' (1991); or Cindy Crawford with the rather implausible label of 'a typical investor' (1994). If you find a picture of a skateboarding rabbit replete with personal stereo and can of soft drink hard to believe, then check out Cindy Crawford feigning interest in the Wall Street Journal. Believe me, you won't find many other annual reports which run credits for wardrobe, hair and make-up artists.
Along with asking more questions of the design consultant in the post-recession 1990s, there also seems to be a trend for companies to ask more questions of themselves within the annual report - and to attempt to provide more answers to the shareholder. The straightforward question and answer session with the chief executive or chairman has come into fashion as a means of providing responses to the questions companies believe their shareholders want to ask.
Despite an obvious weighting in the companies' favour - they make up the questions after all - Stewart acknowledges that there is more willingness to discuss failure and acknowledge some weakness. 'Rather than window dressing, annual reports have become increasingly important in communicating the key elements of a company's vision,' says Scott Greenberg of Curran & Connors in New York state. 'The annual report is perceived as the primary communications document of the company and there's a greater focus on value and on the positioning of the company relative to its peer group. Companies are generally being more forthcoming.'
Indeed, that forthcoming nature blossoms in many of today's reports and has added considerably to their length. Glossaries have become a popular way of unravelling industry jargon to let the reader into the more technical side of the business. Detailed divisional breakdowns are par for the course. And five, ten and even 20-year comparative financial data are often provided, earning extra brownie points from the financial community. Delta, the winner of this magazine's annual report award this year, was specifically commended by the analysts and fund managers who chose it for its inclusion of a ten year financial data summary.
Then there are the footnotes to the financials, some of which can run to a page. These have followed trends on an international basis with explicit breakdowns of directors' remuneration currently in vogue on both sides of the Atlantic. The SEC is now considering a requirement to cut back on some of the footnotes because of the tendency to provide what it sees as excessive information - a move which has been vehemently opposed by many in the US accounting and corporate communities.
Perhaps the best opportunity to lay out the company wares lies in the Management's Discussion and Analysis (MD&A) in the US and the more recently introduced UK equivalents the Operating and Financial Review (OFR). 'The MD&A was mandated by the SEC {during the 1980s} as an attempt to have management interpret in easy to understand language what all those financials mean,' says David Stewart. 'It's added at least four pages to the standard annual report. And in many cases management really has made it easier to understand.' The MD&A has come of age for many companies in recent years as there has been a move away from the rigid, letter of the law structure to a more expansive discussion of results, trends and outlook.
Unlike its US counterpart, the UK's OFR is not mandatory but it has been readily adopted by many companies and is seen as making a real impact on the annual. It was introduced in 1993 as part of the Accounting Standards Board's (ASB's) remit to bring UK accounting back into the international mainstream. David Tweedie, chair of the ASB, says that it has been critical in 'handing accounts back to the management', although he warns against the rigid structure which the US fell victim to in the earlier years of the MD&A.
If, as it seems, fads and fashions dictate the development of the annual report market then you'd be hard pushed to beat the latest trend. The Internet - or more accurately the World Wide Web - and what it can/will/might do for the annual report market is on everyone's lips. And the more switched-on design agencies have rapidly gained proficiency in providing the online alternative. Driven forward by interest in the US, the speed at which the Web has become the talk of the annual report town is mind-boggling. Six months ago, floppy disks and CD-Roms were the way forward but many suggest that these media have now been leap-frogged by the advance of the Net.
But is there actually any value in putting an annual report out on the Internet? Analysts and fund managers are unlikely to waste time waiting to download smiling pictures of a board of directors onto their desktop PCs. And how many private shareholders spend their time surfing cyberspace to get a segmental breakdown on the top performing company in their portfolio? The answer is that there probably aren't any answers. Yet. But there's enough interest, enough talk, and little enough cost to make an experiment worthwhile for many corporate communicators.
'A lot of the companies don't know why they want to do it or who's watching,' says Michael Watras. 'The jury's out. But maintenance of an annual report on the Internet is so cheap it's worth doing anyway. If I were an investor relations director I'd say what is there to lose. For a couple of thousand dollars a year my annual report is floating out there. As such a cheap distribution method there's probably value just in throwing it out there and waiting.'
There are certainly plenty of companies in the US which have already joined the experiment and floated their reports out into cyberspace. And others are queuing up to join their ranks. The 'me too' ethic rings loud and clear once more. 'I sit with investor relations officers and CEOs every day and they go all blurry-eyed as soon as you mention the Internet,' says one New York-based designer. 'They won't admit they don't understand, but they don't have a clue. They just plough ahead anyway.'
One of the few UK companies which has launched its report on the Internet is supermarket chain Tesco. Geoff King, Tesco's investor relations manager, says that the company realised the new medium offered the chance to communicate with a wide group of audiences - not just the shareholders. The company gets a lot of requests for annual reports from schools, colleges and libraries which constitute some of the main Internet users in the UK, so putting the report out on the Net made good sense. Others are just interested in a financial summary so it was useful for them to be able to access that specific information online rather than wait for a hard copy via snail-mail. 'We believe we have identified a financial saving in the distribution of the report,' says King. 'It should reduce the number of annual reports we send out to non-shareholders.'
A recurring theme throughout the talk of putting annual reports on the Web, or other electronic media is that merely replicating the hard copy doesn't add much value. There's little point in using a CD-Rom if it's only going to bring up pages from the traditional annual report. And who will wait for their modem to struggle with a fancy graphic so that they can bring a mirror image of the hard copy annual onto their screen via the Internet?
'People get tremendously excited about the potential delivery of information through new technology,' warns Catherine Samy, director of Merchant Corporate Design in London. 'Everyone who gets excited about it then begins to ask whether they should be doing it. The reality is that, at the moment, the number of receivers of that information remains immensely limited. In the heat of the moment everyone's forgetting the really important issues. Are we communicating? Are we getting across the salient points?'
From a business perspective, of course, it doesn't comes as a a complete shock that designers argue the case for different designs for different media. Bluntly there's more money in it for them. But putting cynicism aside for a moment, they do have a point. IBM has kept itself in the vanguard of the annual report market by releasing its report in hard copy, on CD-Rom and on the Net this year. And there are significant differences between each version. You can even see the whites of Lou Gerstner's eyes on the CD-Rom as he earnestly explains how IBM can remain technologically innovative.
Martin Flaherty of Executive Arts Inc which worked on the IBM reports laments the fact that some companies fail to appreciate the value of adapting the message to fit the means. 'Successful communications rely on an understanding of the message and the medium that message is being delivered in,' says Flaherty. 'Each medium has its own strengths and weaknesses. A lot of CD- Roms are very linear in the way they're laid out - you put it in the drive and it will just go. As a result, the opportunity to participate in the environment is limited.'
Despite IBM's success with the CD-Rom version this year - a spokesperson says that over 25,000 copies have been mailed out on request since its launch at the end of March - there remains scepticism among designers that there are enough shareholders with CD-Rom drives to warrant the expense for most companies. IBM was making a technological statement but that isn't such a priority for a retail chain, for example.
A more widely accessible electronic option is to publish the annual report on floppy disk. But this, too, has its detractors because the variety of formats needed and the suggestion that it will be surpassed by the Internet in the near future. And the common complaint from analysts is that disk versions do not allow the figures to be transferred into their own models so they might as well input them from the hard copy.
Edinburgh-based Enter Media Communications has recently developed an interactive annual report on disk which claims to bypass the latter problem by providing for direct transfer of figures into spreadsheets. It also allows for direct comparison between reports from different companies, which might well appeal to the analyst community. The package is being launched in association with Tayburn design consultants in Scotland and a major London-based design agency, believed to be Addison. Campbell Fox, managing director of Enter Media Communications, says that the floppy disk was selected as the medium for the software initially because it is the most widely accessible for the target audience - at the moment. Fox maintains that the program can easily be switched onto other media as demand dictates.
That flexibility may well apply to the range of other electronic options currently on the market. But the speed of change is accelerating. The provision of corporate information is developing at such a rate that even talk of the Internet, CD-Roms and floppy disks as the mode of the future may be outdated before they have had a chance to make a real impact. Dow Jones launches the first online, on-demand, multimedia, interactive network this September which will run in conjunction with the existing Dow Jones Investor Network (see Technofile, page 59). Analysts and fund managers will have high quality video play-back on their desktops, providing another medium for the annual report.
Meanwhile, Intellectual Capitalism in Toronto and Inc Design in New York have formed a working relationship to develop interactive reports for companies wishing to access the new network. As Nancy Nightingale of Intellectual Capitalism says, 'It can be an enhancement to the traditional annual report. It is an opportunity to speak in different ways to different audiences to help them understand your business better. And an opportunity for interactive dialogue between public companies and the investment services community.'
So does this technological wizardry mean that we are soon going to see the demise of the hard-copy annual report? Not according to many of those involved in the annual report design industry. 'Print will always be with us,' says Bill Ferguson of Inc Design. 'We've had movies and telephones but they haven't replaced print. I don't think anything will replace the power of the written word. It has a certain permanent quality.'
That desire for 'permanent quality' may imply that the traditional annual report will indeed remain with us for some time. But the production of those reports is far from traditional. Speedy transfer of copy between companies and designers via modems and ISDN lines is revolutionising the process. The days when everything was produced on computer and then put onto disk for a courier are fast being left behind. 'We're committed to avoiding the person on the bike,' says Barry Semark of Cairnes Design in London. 'It's a technological breakdown when you have to stick a disk on a bike.'
In this environment, Martin Flaherty does not rule out anything in the drive to present corporate information in new ways. 'In six to twelve months there will be completely different capabilities from today. We see this as the equivalent of the golden age of the movies. We've already moved from black and white into the talkies. Now we're watching special effects come along.'