Don’t call it a groundswell, but something is finally happening to the annual report. After years spent reacting to the crisis of confidence in equity markets by radically toning down their yearbooks, some companies are changing their tune. Annual report specialists in North America and Europe see inklings of a more upbeat reporting season next year, spurred by changing market conditions and new disclosure rules.
The annual report has been reflecting companies’ desire to rebuild investor trust ever since the bubble burst in 1999. Many of the 2003 books mirrored this agenda by swapping creativity and innovation for no-frills statutory information. Companies weren’t making any promises; they just wanted bigger books and more disclosure on a smaller budget.
In the US the ultimate no-frills annual is the 10K wrap, which is essentially obligatory SEC data with some story wrapped around it. This plain vanilla style is popular with some big corporations that aren’t trying to impress shareholders with their annual but rather to satisfy regulatory requirements.
However, this year more companies seem ready to loosen their tone and stretch their muscles for the 2004 book, according to annual report experts, particularly those based in the US. Interestingly, beyond the upturns in the market, experts credit the advent of new reporting requirements and the struggle for analyst coverage with this transition.
Turning a corner
Eliott Saltzman can smell this change in the air. As managing director of annual reports at Addison in New York he reads hundreds of reports each year. ‘The letter from the chairman – the most widely read part of any report – was already more optimistic in 2003,’ he observes. ‘You see phrases like “turning point”, “light at the end of the tunnel” and “improvements in the economy”. Even companies in the Far East are becoming more self-congratulatory.’
But it’s not only that companies are telling stories they’ve kept under wraps. They’re also beginning to use the report differently. ‘The annual is slowly turning into more of a visionary document and less a historic one,’ says Scott Greenberg, president of annual report design firm Curran & Connors. ‘We’re seeing a lot more focus on markets and products in segments.’
The demise of sell-side analyst coverage is one of the factors changing annual reports, especially among small-cap companies, Greenberg notes. Smaller companies are becoming more adventurous so they can stand out in a crowded market, he says. ‘Among Nasdaq companies, 40 percent have no coverage at all and 25 percent have just one analyst covering them,’ Greenberg adds. ‘If these guys have a good story to tell, the annual report might not be just the best place to tell their story – companies are realizing it might be the only place.’
A similar trend is taking shape among UK companies, observes Thomas Newton, a director at 35, a London-based design firm. Big-budgeted companies this side of the Atlantic are less inclined to express their personality in the report than are some mid-caps, he laments. ‘There’s a lot more going on outside the FTSE 100,’ Newton suggests. ‘The smaller guys feel a little less inhibited and try to stick their neck out a bit more.’
A different tool
Many of the changes to annual reports are being driven by regulatory requirements. For example, the SEC mandates that companies provide more informative and transparent management discussion and analysis (MD&A) in annual reports. Traditionally, the MD&A has remained buried in the 10K, with only inquisitive analysts and shareholders bothering to read it.
‘The MD&A became a boilerplate addition,’ says Saltzman. ‘It was never an analysis and it wasn’t even a discussion! The SEC wants to see this take on a much more important role in the future and wants simple and clear language for it. These new regulations allow for narrative sections to become more marketing-oriented.’
The commission issued further guidance on MD&A reporting on December 29, 2003. However, by the time the memorandum reached companies, most had already written their MD&A for 2003. Saltzman predicts this section will be fundamentally different in the 2004 books in terms of clarity and readability. ‘MD&A is going to be much more important – this is the [new] generation of annual reports,’ he states. ‘The SEC is trying to make the finances of the company much more easily understood by the average shareholder, who is also becoming increasingly sophisticated.’
Similar disclosure requirements in annual reports are emerging in Europe, most notably in the UK. Under its operating and financial review (OFR) reporting proposal, the UK government is demanding more detailed information on governance, corporate social responsibility (CSR), and business risk and strategy in annual reports. Companies are being asked to provide this additional information for financial years starting on or after January 1, 2005.
‘There’s going to be more of an attempt to talk about strategy and integrate CSR messages at the front of the report,’ says Stephen Thomas, managing director of CGI BrandSense. ‘OFR is going to be a very powerful tool and companies won’t be able to avoid talking about certain things as easily. They’re already saying, We ought to start moving down this path and talk about value, strategy and intangibles, so we can be more forward-looking.’
‘The issue is that UK companies don’t currently use annual reports as a communications tool; they just use them to report last year’s numbers,’ says Robert Moser, managing director of London-based visual communications firm Merchant. ‘The interesting thing with the OFR legislation is that people are going to have to talk far more about the future and risks to the business.’
But there is still confusion among UK companies about OFR reporting requirements. Specifically, it’s unclear whether the OFR report will need to be included in the summary financial statement (SFS), which is already almost as long as some full annual reports were ten years ago. Also, it’s difficult to prepare this report when there are no peers to look to for guidance.
A lot has happened since 1955 when IBM first realized it could turn pages of tedious financial data into an effective advertising and marketing tool for the company. Present-day reports seem to be coming full circle as firms respond to regulatory changes and work toward presenting a more holistic view to shareholders via visionary-type books.
Early birds
‘The smaller window of time available to [US] companies to report after their fiscal year ends has led many to begin the annual process a lot earlier. We used to work on the front section of the book around September or October, but now companies with a December fiscal year-end are calling us to get going in July and August.’
Gil Roessner, president and founder of Roessner & Co
