Recent corporate accounting scandals and the down economy are affecting the way companies approach their annual reports.This comes at a time when the annual report is becoming ever more important for companies trying to communicate their strategy and vision to a variety of audiences - not just the shareholders. "The annual report is still a company's most rounded corporate capability presentation,
claims Bob Butter, associate director of Ketchum's global corporate practice.
"In the post-Enron environment, there's a need for greater transparency,
says Louis M. Thompson, Jr., president and CEO of the National Investor Relations Institute (NIRI). "GE expanded its annual report by one-third. If that accounts for greater transparency, that's fine. But mere volume isn't the answer to investors."
Boston University IR professor Cynthia Clark points out that in many instances, companies interested in transparency will pull much of the footnoted information into front-of-the-book items, such as the chairman's letter.
In April, NIRI put out a list of pointers for instilling investor confidence.
In one item, NIRI (echoing the SEC) called for expanded MD&A (Management Discussion and Analysis) sections. NIRI wrote that "a company should explain in plain English the key factors that drive its business, the significant trends that could impact the company's performance going forward, and other key factors that could affect the company's business, both on an historical and prospective basis."
This year, companies pondered whether they should directly address Enron and September 11 in their reports.
Sid Cato, editor and publisher of the monthly Newsletter on Annual Reports, says he expected companies to shy away from mentioning September 11, but many do in fact invoke that date, and mostly tastefully, he thinks.
For example, Pfizer mentioned that two of its employees died in the attacks, and that the company is working closely with the government on bioterrorism.
On the other hand, Motorola was criticized by some for including a picture of a firefighter with a radio on the cover of its annual report.
"If what happened relates to a company's business performance for the year, I think it's relevant for the chairman's letter, for example, to discuss September 11,
suggests IR specialist Karen Vahouny, a partner in Qorvis Communications. "But otherwise, the company should stay away from it."
Cato says he was even more surprised at the number of companies that mentioned Enron, usually in the context of the new focus on how companies are managed. For example, Pfizer chairman and CEO Hank McKinnell wrote, "Enron's collapse at the end of 2001 pushed companies to examine all aspects of corporate governance."
Cato says that the number of companies employing an "assumption of responsibility
statement for the accuracy of the financial data, has only been about 50%, and has actually been trending downward. Last year it was 45.8%, and so far this year (in mid-May) it's 43.5%.
On the other hand, Cato labels Pittsburgh-based utility DQE's page on ethics as "revolutionary.
It is signed by senior execs, and in it the company pledges, among other things, not to let its accountants prepare individual employees' tax returns, and not to hire anyone from its accounting firm until at least two years after he or she has left.
In terms of look and feel, a major question this year has been whether to go flashy or austere: Too glitzy, and you might be seen as profligate in these tough times; too sedate, and you might put out the message that your company is hurting.
Still, several experts say the trend is toward plainer reports and even toward (especially among smaller companies) "10-K wraps
- simply issuing the official SEC filing with a letter from the CEO.
Raul Gutierrez, creative director at New York corporate image firm Siegelgale, says that due to the economy, his company did a shorter report (32 pages) for Caterpillar this year.
George Stenitzer, VP of corporate communications at Naperville, IL-based Tellabs, says the telecom-equipment maker considered scaling back on its report, but decided against it. "This is an important time to maintain or improve the level of communications we have with our investors,
he says. "Last year, we had our first annual loss in 20 years, and it was not a time to pull away from the table."
Tellabs took the unusual step of putting a note on the back cover about how much the report cost to produce. Stenitzer says it did that because he knows from focus groups that many investors think the book costs $5 to $10 a copy, when in fact, it cost $1.60 this year - lower than the average $3 to $4.
Debbie Foster, director of corporate communications for H.J. Heinz, says one of her goals this year is to keep down costs in ways the reader of the report won't see. "We held a reverse auction process to get a nice price on printing,
Another effect of the financial contretemps is that although many companies are trying to keep their reports short and concise, others are finding they must add pages to the financial section for further explanation, including footnotes.
Stenitzer says that late in the planning last year, Tellabs decided to expand the financial section by six pages. It also went into greater detail about its products and technology, including inserting definitions into the text. Foster says Heinz's financial section will be slightly larger this year to accommodate additional information.
In a sign of the growing importance of communications, companies are relying less on outsiders to put together their reports. According to Cato, in 1985, 97% used outsiders in whole or in part. In 1998 that figure was down to 90%, and last year it was 80%.
1 Do remember that the annual report is more than just a shareholder's document. It is also an important marketing communications tool
2 Do heed the big themes of the post-Enron world: governance, financial transparency, and corporate social responsibility
3 Do take care in deciding whether to mention current events such as 9-11. Only bring them up if they have affected your company's business
1 Don't start too late. With an increasing focus on transparency, more people will want to sign off on the report - which will take more time
2 Don't take lightly the issue of whether to create a plain or elaborate report. Either tack can send several messages
3 Don't do all financial explaining in footnotes. Crucial details must be told - in plain English - either in the CEO's letter or other front-of-the-book sections.