Want your next annual report to be horrid? Design a cover so bland, so devoid of substance that it threatens to induce reader narcolepsy. Put as many words as you can in the chairman’s message. Make the sentences really long. Say as little as possible about things that didn’t go right. And ask your employees for digital photos. These pictures are not only homespun – they’re free.
Take these steps, experts say, and your document will have shareholders and the financial community wagging their tongues with colorful language of their own. That’s not the way it’s supposed to be. Most companies spend significant amounts of money and time to create these self-administered report cards.
For whatever reason – poor planning, misguided advice or rancid execution – many publicly traded companies continue to produce failing annual reports. All too often, management falls victim to one or more of the following seven deadly sins of annual reporting.
1- Flat writing
‘Our objective with this annual report is to offer you detailed information on the conduct of business and the results achieved by the company in 2002.’ That is the chairman’s opening sentence from Spanish utility Endesa’s 2002 annual report.
It’s an example of many reports with banal chairman’s statements that lack personality and underestimate reader intelligence, says Matthew Grenier, who analyzes the reports of the top 100 European firms ranked by the Financial Times.
‘Sometimes the writing seems to be designed to make the reader close the annual report and walk away,’ observes Rebecca McEnally, director of capital markets for CFA Institute, a non-profit organization that administers the worldwide chartered financial analyst (CFA) program.
Long sentences and multiple dependent clauses play havoc with clarity and understanding. Sid Cato knows this first-hand – his newsletter, which critiques annual reports and highlights trends, penalizes reports with overly long sentences. Long letters also draw Cato’s wrath: he castigates Cinergy’s 23-page letter to shareholders – which is between six and eight times the worldwide average length – as a reflection of the chief executive’s ‘massive unbridled ego.’
An annual report can be glossy, with dramatic graphics and artistic photography, ‘but it’s a failure if it reads terribly and the investment story lacks impact,’ points out Martin Hennessey, managing director of London agency The Writer. ‘The truth is that a failure to invest in the words is generally a false economy.’
2- A boring cover
In this case, you can judge a book by its cover. The cover sets the stage and tone for a company’s report. If it doesn’t lure the reader inside, it has failed. ‘A cover gets someone to read on – or put the report down,’ says Susan Karlin, president of Suka Design, a New York design agency that produces both corporate and non-profit reports. A cover should grab a reader, be provocative, say something unique and reflect a strong, convincing theme – far more than a rote recitation of name and year, Karlin says.
Companies reporting a less-than-stellar year don’t necessarily have to feature dancing and singing on their annual report cover. ‘But make it interesting,’ advises Richard Carpenter, writing consultant and development director of corporate reporting at Radley Yeldar.
3- Hiding the story
Nothing infuriates the investment community more than hiding information or skipping around tough issues. That’s the most common mistake companies make, says McEnally. ‘It’s simply failing to provide information that people need, and obscuring critical information,’ she observes. ‘Eventually investors find out, and that’s when the lawsuits start. Companies and management fare better in the long run if they are forthcoming.’
The European fashion company Vivat Holdings diverted attention in its 1990 annual report, financial columnists suggest, by publishing a photo of a topless woman next to its financial statements. The report didn’t sit well with shareholders. Vivat no longer exists as a publicly traded company.
In such cases, management sometimes thinks ‘it can pull the wool over its audience’s eyes,’ says Hennessey. ‘It doesn’t really care what the outside world thinks.’
4- Misleading charts and graphs
Figures don’t lie, but they can create the wrong impression. Bars in charts can be flip-flopped. At first glance, they can suggest fortunes are rising rather than falling. Large percentage changes can be softened or magnified by changing the starting point on the bar scale. Some companies cherry-pick charts for inclusion in good years, but not in bad ones, notes Carpenter.
5- Hyperactive or lethargic design
Overactive design can confuse readers. With many elements – copy, graphics and photography – competing for dominance, the eye can bounce off the page. Cato thought his cat’s hair had fallen onto the page of a report he was reviewing, but he quickly discovered the ‘hairs’ were designer-placed thin curved lines. He has also seen a number of other graphic devices – arcs, upside-down type – that make him yearn for designs that are ‘clean, inviting and user-friendly’.
Clean doesn’t have to mean bland, as was the case with tobacco company Gallaher Group’s 2004 annual report and financial statements. ‘I know the tobacco industry is controversial, but the company’s apparent wish to avoid offending anyone led to one of the greyest reports ever,’ notes Hennessey.
Orange’s 2002 report was little better. Investors received a plain Word-style document, with no photos, no chairman’s statement, no graphs, ‘and no attempt made, it appears, to engage the reader,’ says Grenier. ‘And this from Orange, a perceived leader in brand communication.’
If only more companies’ reports were basic, says McEnally. ‘As a fundamental analyst, I would be delighted if annual reports were plain and not a lot of money was spent on glossy paper and expensive photographs,’ she comments.
‘Overdesign, underdesign – there is a balance you have to strike,’ says Karlin. ‘You want to direct the reader and not make him or her struggle. Time is limited. You want to pull them in, hook them and provide texture to keep them.’
6- Type from hell
Poorly used typefaces can stop a reader cold. In Wallace Computer Services’ 1998 annual, white type on a silver background tended to obscure information – ‘especially in a financial highlights section showing a falloff of net income,’ recalls Cato.
Many type problems occur in footnotes. ‘A key problem is increasing amounts of regulation,’ says Carpenter. ‘It leads companies to try to squeeze additional content into the same space to keep costs down so they don’t have to print a larger report.’ This means companies resort to tighter leading (the space between lines of text) and smaller type. McEnally suggests putting narrative information into tabular form where possible.
7- Myopic use of photography
The digital camera has changed the photographic landscape, says photographer Benjamin Chapnick, president of New York-based Blackstar. Because amateurs (typically employees) don’t have experience in lighting, composition, background and so on, they produce digital images that are inconsistent but free of charge. Images can be corrected to a certain extent with computer software, but the power of a professional’s trained eye can’t be replaced.
‘Photography should advance the theme while building the corporate brand,’ Carpenter says. ‘Why skimp on doing it right? It makes the company look cheap.’
Sometimes purchased photography leads to problems, too. Karlin remembers when the same stock image showed up on the annual report covers of two technology competitors. ‘Be original or you will look bad,’ she warns.
Good or bad, the direction or theme is ultimately the CEO’s responsibility. ‘That has always been true – the CEO gets the ultimate say,’ says Chapnick.
Final word
At best, poor reports will lose you readers, experts say. At worst, they can damage corporate credibility and reputation. ‘An annual report is a company’s number one opportunity to create a positioning for the firm and to set itself apart with a compelling investment story,’ says Debbie Mitchell, former chair of the National Investor Relations Institute (Niri) and senior managing director of IR at Dix & Eaton in Cleveland. The biggest sin of all may be squandering that opportunity.
Report virtues
Now you’re familiar with the most common annual report vices, discover the latest trends and best practices are by requesting a copy of the European Annual Report & IR Web Site Yearbook 2006, produced by IR magazine in association with PrecisionIR. For details, e-mail [email protected].
