Human evolution is not the amazing feat of biology that it’s made out to be. Look at the evidence: humankind has developed over three million years and it’s still producing specimens as fundamentally awful as Chevy Chase. The development of annual reports, on the other hand, has been quite a marvel. The annual report hasn’t been in existence for anywhere near three million years (probably not even two million) and yet the best practice bar is being raised and raised at a cracking rate.
In fact, it almost seems as if progress is accelerating by all accounts, the internet is to corporate reporting what the wheel was to humans, and with this new tool the whole game is forging ahead. So what are the defining trends in this period of evolution? And what’s on the horizon?
“There’s going to be a lot going on in the future of corporate reporting,” says Jo Sumner of UK-based design firm CGI. And that view is pretty well unanimous in an industry that appears to be in a state of flux. As the discipline of investor relations undergoes an overhaul, so, it seems, do its appendages.
“I think you have to look at the changes that we’re seeing in IR itself,” says Tom Robinson of UK designers Addison. “And by that I mean: globalization; increased competition for capital; a rise in investor expectations; closer relationships between investors and companies; a rise in stakeholder and shareholder activism; a movement towards real time financial reporting; technology driving greater transparency; the growth of an equity culture; the leveling of the disclosure playing field between large and small investors; and more active retail investors.”
Who’s reading?
Naturally, to a large extent it is the audience that dictates the form and content of annual reporting. With this in mind, companies are keeping a beady eye on the readership.
“Companies are also starting to address a global audience,” says Sumner. “And I think the audience has become more sophisticated and discerning. Investors want to understand a company’s marketing stance and its strategy. They’re always thinking, Should I hold this stock for the long term?”
CGI’s research suggests that this is imbuing the annual report with greater significance. “The annual report used to be a three-minute read on average,” says Sumner. “It’s now 30 minutes on average.”
In terms of targeting, it would appear that there is a shift in emphasis so that all audiences will soon be regarded with equanimity. But, as Scott Greenberg, managing director of US-based designers Curran & Connors, points out, “Institutional investors are still the main audience.” That said, Greenberg does accept that, “Reports are also aimed towards employees, especially as Esops are more common. Smaller investors are also targeted because they are increasingly important. I read recently that small investors are now responsible for 30 percent of all trades so communicating with them is crucial.” Companies are certainly starting to realize this and, with the level of sophistication of corporate communication, this isn’t necessarily causing a nightmare quandary. Says Nancy Fuller, managing director of New York-based Addison: “A couple of years ago it was the institutional shareholders that were the primary target, with employees and small investors considered along with them. Now with the integration of the web and print versions, companies are able to pick their audiences apart.”
Such precise targeting is still in an embryonic stage, however. “People are still asking questions and learning,” says Fuller. “For example, does the web target retail investors more than other audiences? Companies are very much in fact-finding mode at the moment and trying to find a balance between the web and print versions.” Robinson divides the audience into four broad sections: owners (comprising stakeholders, investors and analysts); the market (which includes customers and suppliers); employees (current and future); and the wider community (including non-governmental organizations). And he considers that each section should be deemed an important and viable audience. “From our research, we’ve seen that pressure groups are demanding more information and that is having a clear impact in communications,” he says. “Ineffective communication is seen as a sign of either incompetence or arrogance. The question then is how does an organization start to develop effective communications with a range of different people? And how does it go about developing interactive communication, a dialogue with them?”
Two-way talking
This is the question that is currently occupying the minds of communications experts throughout the corporate world. Companies are realizing that it is high time annual reports became a little more vital. “We slip questionnaires into the report and then track them,” says Sumner. “We are very keen to get feedback. It’s about being inclusive and creating a dialogue with the audience.”
“The trend towards interactive reporting is in its infancy but is becoming more frequent,” argues Greenberg. Unfortunately, that bandwagon isn’t exactly crammed full with eager passengers. “What’s happening is companies are polarizing between those who keep plowing on with the same formula and those who see the need to develop more sophisticated communication and who want to set up interactive communications channels,” says Robinson. In his opinion, it’s not such a tricky concept to grasp: “Dialogue doesn’t mean that you have to have a constant two-way conversation with all parties,” he continues. “It just means ensuring that the channels are developed.”
Besides, with the technology that’s at the IR professional’s disposal, interactive communication needn’t be rocket science. And yet, according to Robinson, “Many companies have a real misunderstanding of what technology can do. They have a PDF version of their reports on the net with the front and back cover. In fact, you need to have a clear investor relations program online, not just a library of PDFs to download.”
“The impact of the web has been tremendous,” considers David Dunkelberger, account director with Addison (the US version). “And there is now a heightened synergy between the web version and the print version.”
Indeed, most commentators agree that the death of printed annual reports has been greatly exaggerated. “I don’t think there’s any indication that the printed annual report is dying. We’re printing more than ever. Online annual reports are additions to the printed versions, not substitutes,” Dunkelberger says.
Strategic thinking
For many people, the medium and the audience are of secondary concern in the evolutionary process. They see strategy and purpose as the key development. “The annual report is becoming much more visionary, more forward-looking,” opines Greenberg. “It’s focusing on the markets and on growth. It’s less historical.” After all, he declares, “People don’t buy stock because you made money yesterday. They buy because they think you’ll make money tomorrow.”
Naturally, that emphasis manifests itself most obviously in an annual report’s prose. “You only have to look at how the letters and the narrative have become more forward-looking,” maintains Dunkelberger.
Of course, it’s easy to make broad statements of intent or pepper subtle references to the future through the report, but several companies are going further. “Some companies are including a strategy statement – particularly since the start of the new millennium, as if they’re thinking maybe it’s time to turn over a new leaf,” observes Sumner.
Such a shift in thinking means that the reporting process now involves much more than doling out facts and figures – and that is now reflected in the planning process. “These days, we’re discussing annual reports with people in marketing, public affairs, investor relations, corporate communications,” remarks Addison’s Fuller.
What’s more, the report is being used as a means of communicating the company’s individual identity. Given that the much of the nitty-gritty information is more easily available from other sources, companies are now using the annual report to place a unique stamp on their communication.
“There’s more of a focus on brand differentiation,” reckons Sumner. “Annual reports are now about communicating your corporate personality, your corporate religion, your corporate soul.”
This involves the discussion of intangible elements such as community relations and employment culture. “The annual report is also becoming more of a social report, explaining how the company looks after its staff and suppliers, for example,” states Sumner. “After all, shareholders can get the share price and other financial information from the web. ICI’s is a good example of a report that really gets across its corporate personality.”
Hodgepodge danger
Ramming a fully comprehensive raft of diverse ingredients into the report in an attempt to satisfy all audiences can create a mighty foul-tasting dish, though. And, according to Addison’s Robinson, that is precisely what has happened to the annual report. “The annual report has become a kind of Jack of all trades, which means it is failing to communicate properly with any of its audiences. You really can’t tailor it to satisfy everyone.”
His concerns are understandable. With an influx of more nebulous, future-oriented concepts, you’d expect annual reports to become more annoyingly vague and murky. Yet, the opposite seems to be the case and there is no shortage of commentators who are quite happy with the content of annual reports. “Companies are focusing on the clarity of the message,” says Fuller. “They’re using the report to develop an understanding of the company. Management letters are more straightforward and no-nonsense. I think that’s due to the amount of M&A and deregulation that we’ve seen. There’s a pressure on senior management to really clarify the position of the company.”
With this truth in mind, and with the internet providing a more dynamic outlet for information, printed reports are adjusting the level of content and thankfully steering clear of data overload.
“The annual report is generally shorter,” according to Sumner, “because a lot more information is being put up on the web. That said, the financials are not being neglected because the web site can stump up the goods. There’s an increase in financial disclosure and more people are putting their 10K into the report.”
Still, trends come and go. But, as Sumner points out, there remain several fundamental rules to annual reporting: “The key is simply open and honest communication. And you need to show consistency.”
Give them suites
Even with a trend towards scaling back and simplicity, Robinson believes that reporting in its current form is unsustainable. He foresees change in the near future.
“Following the UK company law review, will we see the annual report become just a black and white document that’s filed and can then be read 30 seconds later?” he asks. “And then would we have another document around the time of the prelims that is geared to looking at the message?”
To a degree, this is already starting to happen. Companies are accepting that a “Jack of all trades” annual report is a hodgepodge of disparate information.
“We’re now seeing companies moving towards a suite of documents,” says Sumner, “that encompasses a social report, an economic report and an environmental report. BNFL, Royal Dutch Shell and Severn Trent all produce a good suite of reports like this.”
For Robinson, this approach is not sufficiently visionary. “It doesn’t just involve breaking reporting down into a suite of literature. It’s important to use technology and to communicate interactively online.”
However, with so many sources of information now available, there is a danger that your key message will become obscured or lost in the melee. Design trends are adjusting to meet that challenge.
“From a design standpoint, we talk of internet time,” says Dunkelberger. “People have very little patience these days when it comes to wading through annual reports. Because of that, you’ve got to think, How can I sound bite the company? Because people often have three or four things they’re looking for. I suggest having multiple points of entry – quotes or diagrams that pull the reader into the report.” And that ethos applies to printed reports, too. “Graphically, they are changing,” says Greenberg. “There’s more bold print to make the annual report scannable.”
For all the talk of new demands, rules and absolutes, one element of annual reporting remains constant. As Sumner says, “There’s no set rule. Each company is different.”
Cato’s criteria
IR has moved on at such a rate over the last decade or two that a 21st century report would bear little resemblance to its 1980s forebears. New audiences, technologies and trends have emerged over recent years, meaning that the annual report is a different beast.
But not everyone sees it that way. Sid Cato produces Sid Cato’s Newsletter on Annual Reports, a monthly analysis of the industry. He scores every report against a set of fixed criteria with a maximum score of 135 points.
The criteria were copyrighted by Cato way back in 1984 and it shows. There is no reference to interactivity with the audience -a feature regarded as de rigeur these days. Moreover, the list is named “Sid Cato’s standards for the annual report to shareholders”. As Addison’s Tom Robinson points out, investors are by no means the sole target.
Cato, however, argues that he is keeping up with best practice. “I keep raising the bar, tightening the screw,” he says. “To get a top score, companies now have to include a grid that explains their operation. They need to name three competitors and three customers by name. I keep re-evaluating my standards.”
But companies are struggling to keep up with Cato, it seems. “The quality of annual reporting is not improving and that dismays me,” he says. “After 17 years in the business, I’d have expected a great leap, and yet there’s only a nucleus of around four dozen that make it into what I call world-class standard.”
