Looking at the balancing act involved in creating 2002 annual reports
It's time to hone your balancing skills. This year's annual report season requires IROs to juggle the demands of two key - yet conflicting - drivers.
First up, and few surprises here, budgets are tight. The global downturn means communications budgets are under more pressure than they have been since the early 1990s and, with the annual report more than capable of sucking up a lot of the communications loot, keeping a tight grip on the purse strings is the way to go.
Unfortunately, this also comes at a time when investor confidence is at a real low. Enron, WorldCom and big bear markets mean equity investors need their hands holding more than ever. More is the name of the game - more information, more disclosure, more transparency - and that can imply bigger books which, in turn, usually require bigger budgets.
The solution, it seems, lies in squeezing more communication value out of the same budget. Annual report consultants predict tighter text, less fluff and less grandiose graphics and pictures than in previous years.
Tightening belts
A recent survey by the National Investor Relations Institute (Niri) in the US provides some interesting figures on budget tightening and confirms that annual report budgets are much lower compared to the last survey in 1999 (see Evolving annuals, page 15). How are companies cutting costs? By doing more in-house, producing shorter reports or 10K wraps, and spending less on outside designers ($30,000 compared to $50,000 in 1999) . They're also doing online reports while cutting back on print runs and hard copy distribution, a drop of more than 6 percent from an average of 99,000 in 1999 to 92,700 this year.
Gene Mayer, principal and creative director of Milford, Connecticut-based consultancy Gene Mayer Associates, is not the least bit surprised by the cutbacks in expenditure, noting that 'budgets are always an issue.' He does predict, however, that few companies will allow tight budgets to push them down the road of a 10K wrap this year - particularly if they have not done one in the past. It's just too risky at a time when investors are demanding more information. 'In this climate it could potentially send a negative message. We're in an era when no-one wants to be seen to be hiding things. I think we'll see a lot of hand-holding letters from CEOs.'
In agreement is Nina Eisenman of New York-based Eisenman Associates. She says recent client meetings have given strong indications that many companies are backing away from the idea of a 10K wrap this time round. She points out that the 10K is often legalistic in nature yet investors and regulators are demanding more up-front, clear language that makes senior executives seem more accessible. Q&As with the chairman and CEO are a good means of getting the messages across, reports Eisenman.
Many of these trends are being mirrored on the other side of the Atlantic, too. Roger Burgess, a director at London-based Pauffley, which produces reports for blue chips across Europe, says the need to engender trust in this year's reports will be paramount. His clients are approaching this in two ways: by increasing the levels of disclosure in their reports and by changing the tone of the language and presentation. 'We're seeing a tremendous resistance to any suggestion of spin. Companies are aware they've really got to sound as if they mean it rather than glossing over issues with a positive spin.'
Reassuring investors does not necessarily mean going on the defensive, though. 'The smart companies will be saying this is what we do, this is how we do it and here are the numbers to support it,' says Gene Mayer. 'The companies that haven't been so up-front in the past will have to improve.'
Several consultants refer to the need for stronger links between the corporate strategy or 'story' and the theme of the annual report. The old idea of choosing some wacky theme, which had little or nothing to do with the company or the direction in which it is moving, is generally perceived as one big no-no this year.
Today's report can't be just a tour of the company, and the story has to be developed but not manufactured, say the experts. Duane Maidens, chief executive of branding consulting firm Michael Patrick Partners in Palo Alto, California, suggests the corporate story has to be brought out by developing the non-financial attributes almost as much as the financials. 'The smart CEO or CFO understands the value in explaining to the reader how they view the marketplace, the trends in that marketplace, and how they fit into that marketplace. It's all about helping readers to understand what road the company is on within that market.'
Online talk
Five years ago many design consultancies were advising clients to invest thousands of dollars in producing glitzy online reports. Online communication, we were told, was the way of the future and the printed annual report was on the decline. Today the printed annual has already made a strong comeback relative to its online peers, and that trend is almost certain to continue this year.
Many companies are choosing to devote the vast majority of their budget to the printed document and then put a PDF version online. This approach is a recognition that most people prefer to read the hard copy while having an online report can help satisfy the needs of casual readers, students, journalists and others who want the information quickly but just temporarily.
Phillip Mann, a director at London-based brand and communications firm BamberForsyth:Fitch, points out that some of his major clients are actually getting more requests for hard-copy reports despite attempts to cut print runs by making reports available online. 'We have to recognize that the internet is not a good reading medium, though it is good for getting information quickly.'
PDFs are not the only solution to the online reporting conundrum, however. The need to get the message across to stakeholders regardless of the channel being used means many companies are still ramping up their online reporting; they are just being a bit more selective over how they spend their budgets. Instead of producing a flashy HTML version of the complete annual, it's more common to select key components of the printed document to develop in an online format. This year putting the chairman's letter into video seems a popular choice as companies try to make their key executives more accessible. The rest of the report may then be made available in an indexed PDF, perhaps with downloadable spreadsheets for the numbers. Several consultants also mention interactive notes to the financials: the note either pops up as you pass the mouse over the relevant data or is available via a hyperlink from the same page.
Motorcycle manufacturer Harley-Davidson sums up the experience of many companies when it says its hard-copy annual report is as popular as ever despite continued investment in an online presence. Pat Davidson, Harley's director of investor relations, notes that the company is blessed with 'cool products and fun stuff', which might help push the printed annual over and above the online version. It won an Arc award this year for the 2001 book. Indeed, Davidson believes some people go so far as to view the company's annual as a coffee table book - the online version just cannot compete. 'The printed annual report remains a marketing piece for us. We hope people get a flavor of the company from its pages.'
Transatlantic split
Perhaps the key difference between Europe and the US lies in the strong trend towards corporate social responsibility in Europe. Every European consultant interviewed for this article mentions it without prompting; in the US it is never raised as an issue even though US companies are certainly including more CSR information than before.
The UK and Scandinavia, in particular, are CSR-mad, viewing it as a means of instilling confidence in investors. And companies in certain European markets, such as France and Denmark, are now legally bound to report on social and environmental issues. The general consensus seems to be that companies will choose to increase the level of CSR reporting within their main annual reports rather than produce a separate document - unless they have previously gone down the separate report route.
Klaus Faenoe, creative director at Hans Due Design in Denmark, disagrees, however, suggesting that in his country, at least, the annual report is no longer the primary way to address stakeholders. 'Using the internet and separate printed publications is key,' he says.
There also remains some skepticism as to whether CSR is just another reporting 'fad'. Robert Moser, managing director of Merchant, points to a recent survey of fund managers and analysts conducted by his agency that suggests that the City is still not very keen to receive extra CSR information. 'Many of the fund managers we spoke to are not interested,' he says. 'They just want to know whether a company is clean and honest. Are their products going to have a detrimental effect on the environment? Is their waste going to poison people?' Anything more is superfluous, he says.
It may even be time for another complete rethink of the annual report and overall reporting process. David Bickerton, head of external communications at BP, believes everyone has to go back to the drawing board and 'question what we're trying to do with the whole reporting environment.' He notes higher levels of scrutiny not just from investors but from all types of stakeholders, and that raises questions as to the best means of providing them with the information they need.
Reputation first
Not surprisingly, the in-house folk responsible for producing the next crop of annual reports are focusing much of their energy and thinking on rebuilding investor confidence. Wilson Grabill in the corporate affairs department at Bristol-Myers Squibb notes a high interest in corporate governance issues, and that will have an effect on the next crop of annual reports. He admits that BMS is still in the early stages of developing next year's annual but he believes that tight budgets will mean a cutback in content for any major US company. And this is not the year to cut back on disclosure: 'It's important to tell the story and tell it right but still do it in a cost-effective way.'
Pat Davidson at Harley agrees that 2002 will be all about more disclosure even if budgets are tight: 'I'd be shocked if anyone had less financial disclosure than they had before. Most companies will be willing to disclose more this year than ever before.' That, in itself, raises a further challenge, however. While investors clamor for more information, they also want that information to be kept as simple and straightforward as possible. Davidson believes it is a Catch 22 situation: 'To give more information you can end up complicating an issue. That's where the challenge lies: keeping it simple and providing more information.'
Despite the difficulty of having to communicate some of the worst results in corporate history in this year's reports, there is a faint glimmer of hope for IROs. Niri's annual report survey reveals the annual report is increasingly the responsibility of the IR team instead of being the chore of other, less financially-minded departments. That's good news for the power of the IR function but scant consolation as you burn the midnight oil completing this year's book.
Predictions for 2002 annual reports
'Expect to see less use of footnotes and more use of text and visuals to explain material information.'
Christine Lumpkins, Coffin Communications Group
'The ethical questions raised by the scandals will cause more companies to focus on their corporate good deeds.'
Marc Jampole, Jampole Communications
'Expect to see more straight-shooting from the CEO and other senior executives. They need to demonstrate that they know what's going on at their company in plain English - no late 1990s jargon.'
Mack Reynolds, Adam Friedman Associates
'Financial sections will continue to expand to ensure that companies are providing complete and clear information. Look for less white space and more efforts to use plain English.'
Mary Dunbar, Dix & Eaton
'Expect annual reports to be more direct with the CEO letter offering mea culpas galore and Accounting 101 lessons for shareholders.'
Tom Joyce, Carmichael Lynch Spong