Are companies talking to their stakeholders in their annual reports?
Annual reports are full of it. Shareholder value creation, that is. Any review of a good sample of reports from across the globe over the last few years shows that. But with all this focus on communicating with shareholders, has the annual report lost sight of other audiences? Do reports speak to a company's employees, customers, suppliers and the local community as well as the primary shareholder audience?
To find out, Investor Relations magazine took an annual report scorecard developed by the London-based Centre for Tomorrow's Company and put a select group of reports to the test. The Centre has been advocating a wider stakeholder approach to communication and business management for a number of years and released its scorecard in March.
It's by no means a perfect measure, but it does provide a system for evaluating whether companies are taking serious account of these other audiences within their reports. Here we've applied that system to a selected group of ten annual reports and evaluated the results.
Purpose & values
The first question on the scorecard is whether reports produce any clear statement of purpose and values. These shouldn't be hidden in the depths but should be loud, proud, distinct and, crucially, consistently reflected throughout the document.
Most of our sample scored well here. Norfolk Southern and BP came away with the best scores for consistency of approach throughout, but Aegon, BAA and Philip Morris were snapping closely at their heels. 'Our vision,' says Norfolk Southern in its inside front cover. 'Be the safest, most customer-focused and successful transportation company in the world.' It then backs this up with further, clear policy statements all the way through the document. Indeed, it's difficult to find one spread in the whole report (excluding the financial statements) where readers weren't reminded of the original statement and how it fitted into the overall goals.
BP's mission statement was slightly more waffly but also on the inside front cover. It included: 'Energy and materials, used safely and efficiently, are essential to the prosperity and growth of every country and region in the world...To play a leading role in meeting these needs...is BP's goal.' Again, the content of the values and purpose is reflected throughout the document.
Worst performer in this category was Deutsche Bank with no separate statement of purpose or values. In fact, close inspection of the whole document revealed very little on what the company feels it stands for or where it really wants to be going.
The second category looks at how companies link their financial success (or failure) to employees, customers, suppliers and the like. Again, Norfolk Southern and BP were the top performers with most of the remainder trailing quite far behind. Most made some mention but failed to address directly the question of how stakeholders linked into the story at key stages.
The biggest mistake as far as the scorecard criteria were concerned was making a big deal about these relationships in, say, the chairman's statement then failing to mention them again in each section. The scorecard refers to these as 'fragmentary references' and an inability to set out a 'clear model'. The fact that this averaged out as the worst performing category says it all. It's worth noting that this (along with the following category) was Deutsche Bank's equal best score (with 57 percent). Reflecting the typically broader German corporate approach, several sections of its report make at least passing reference to some form of stakeholder relationship and how this is linked to financial success.
'Making progress in key relationships,' is the title of the third category, which looks at how reports detail progress in stakeholder relationships. Once more, Norfolk Southern and BP led the pack. BP, for example, explains how its community programs are helping move its relationship with stakeholders forward in little asides throughout the report and then builds on those within the main text. Norfolk Southern even includes graphics and commentary on employee safety showing how it has improved its record and intends to continue doing so in the future.
Other companies in the sample, such as Philip Morris, BAA and Legal & General, have good sections or box-outs on how they work with the community and employees. However, they don't score as highly as the leaders, either because they are less detailed or because they fail to mention targets or means for developing their programs.
The scorecard warns against the danger of including these relationships as an afterthought, which is where Nova loses marks. It has a double-page spread at the back of the book which talks about its own 'balanced scorecard' approach to shareholders, customers, community & society and employees. Despite this noble approach there is scant mention of these groups elsewhere in the report, which casts doubt on its sincerity.
Does the report show the community, regulatory bodies, and the media any evidence for the value it is adding to the community? asks the next category. Again, the scorecard demands a coherent policy, measurement and 'a process of dialogue.'
Tractebel performs particularly well in this area, with excellent commentary on the environment, community and other relationships in separate sections and spread throughout the document, too. 'The Tractebel Group aims to act as a citizen company and is strongly committed to reducing the environmental impact of its activities,' states the report. But it doesn't leave it there, proceeding to give more detail and the means of obtaining further information.
Rather surprisingly, Heinz's community commentary is fairly limited by comparison. It talks about infant feeding programs but only in terms of the money to be made and the chances for expansion. Indeed, the majority of the report concentrates on financial or growth goals, detailing how its employees can help develop the company but saying very little about what the company does to help its stakeholders.
Tractebel comes out as the overall leader in the fifth section which concentrates on making other parts of the communications process accessible to various audiences throughout the annual report. The whole of Tractebel's document is dotted with cross-references to other publications, web sites, telephone numbers and so on for readers to obtain further information. BP also scores well here but others do not. Some, like Deutsche Bank and Philip Morris, make an attempt to list other publications at the back. Others seem to think that an inside back cover reference to a web site or similar will suffice.
The penultimate category deals with the report's account of the board's stewardship over time. The scorecard asks for rigorous comparison with previous years as well as targets for the future. Here the North American companies come into their own. All have detailed discussions comparing the current year with previous years. They also tend to have better commentaries on the past and the future in their management's discussion and analysis sections than their counterparts from other regions in corresponding sections of their reports.
Legal & General and Aegon come through in the middle ground (as they do in most of the categories) as far as stewardship over time reporting goes, but BP is only slightly ahead of them in this field.
Finally, we come to clarity – whether the report is written in plain language, communicates the big picture in words and graphics, and (for top marks) shows signs of initiating a two-way communication process with company stakeholders. No company received top marks as the allocation system is too gruelling. They have to attain all of the lower marks before moving upwards. We tweaked the system slightly here to recognize the higher level attributes.
Still, several companies came out relatively well in the clarity stakes. BAA, Norfolk Southern, Aegon and BP are the leaders with good, clear reports which easily give you a sense of what the company is all about. Philip Morris, Legal & General and Tractebel are close runners-up, dropping a few points on overall layout and ease of access to information. They are all good, clear reports but lack something compared to the leaders. Heinz focuses on seven employees and their contribution to the company which works reasonably well but this makes it slightly more difficult to access the overall story.
The scorecard talks about lower-scoring reports being 'written in a code known only to experienced insiders'. Nova lost points here with layout and graphics adding to the need for several re-reads. Deutsche Bank occasionally drifted into the 'experienced insiders' area but also lost marks in clarity for drab, legalistic text.
The scorecard might not be a perfect tool for assessing the nature of stakeholder communication in the annual report. Indeed, Mark Goyder, director of the Centre for Tomorrow's Company, is the first to admit that. However, he says: 'It does get you pretty close to the heart of a company. I think it's a pretty powerful tool for bringing out strengths and weaknesses.'