Those heavy envelopes that every year drop into the mailboxes of Ma and Pa investor or mount in weighty piles on the desks of stockbrokers, financial analysts and journalists have an important story to tell. But how well do annual reports perform as communication tool for the enterprise? And do they tell the full story?
The increased focus on good corporate governance has shareholders demanding greater disclosure as to how company is being run, exactly who’s doing the running – and who’s checking the veracity of the performance. Transparency is the new watchword and consequently annual reports are getting fatter and more detailed.
More disclosure is the most noticeable trend in annual reporting, says Mike Tisdall, managing director of Insight Communications. “The corporate governance sections are getting bigger each year and there’s much greater emphasis on going beyond traditional annual reporting structure to really convey what makes the company tick.”
Investors are increasingly wary of corporate reports that, while technically correct, fail to provide true picture of organisational health and future prospects, warns international accounting firm PricewaterhouseCoopers.
PWC is promoting what it calls “ValueReporting” – framework that provides more detailed picture of how well management is implementing its strategies and reporting on non-financial value drivers and intangible assets. Framework headings include sections such as market overview, value strategy (eg, goals, organisational design, governance), value creating activities (eg, innovation, brands, people, customers, corporate reputation), and financial performance including commentary on issues such as risk management.
The approach helps build shareholder confidence to know whether company is satisfying its customers, retaining employees, responding to market dynamics or living up to claims of being good corporate citizen. After conducting some global research on annual reports last year, PWC found that for many companies it was case of “all mouth, no trousers” – claims of corporate responsibility lacked evidential support.
Tisdall cites Waste Management as company with good story to tell and, because it doesn’t have high profile, its annual report provides good opportunity to tell it. “It’s very good company in terms of their integrity in what they do and nobody knows much about it – the annual report carries the weight of that communication.”
Under “think again” catchphrase, it explains how the company turns rubbish into raw materials, how its landfill functions as an energy source powering 1400 homes, how it transforms organic waste to compost and waste oil into reusable commodity.
He believes the PWC approach of building the reporting structure around business value drivers deserves strong future. “If clients adopt the notion, it means they’re cutting to the chase and communicating material that directly impacts on their performance.”
Sky TV and Meridian Energy are examples of companies that have identified factors central to the success of the business, then built the report approach around these, says Tisdall. Sky’s performance as company is measured against its key success factors of strong programmes, loyal subscribers, robust technology, passionate people and increasing profits.
Strategic communication
This move toward greater company introspection and disclosure is making the annual report more effective communication tool, says Tisdall. “In the past two to three years, there’s been resurgence in companies wanting to use their annual report to speak to relevant audiences about what their organisation stands for – its culture, key messages, that drives the value of the business.”
Tisdall has been helping companies design effective communication strategies since the heady pre-crash days of the mid-’80s when share investment was at an all-time high and glossy reports were weapons in the competition for shareholder funds. “There was huge element of one-upmanship involved and we enjoyed that but, looking back, you have to say it was over the top. The reaction to that whole era was back-to-basics approach.”
In the early to mid-’90s it was more matter of keeping the report basic but making good job of it, says Tisdall. “Now there is real sense that companies want to be better understood and that’s become prime objective in designing an annual report.”
Shareholders are getting better deal in terms of the information included in annual reports but it pays to be little sceptical, according to Oliver Saint, director of research for the NZ Shareholders Association. Reality, he says, may not always measure up to appearance. “You have to be aware that reports do get sexed up bit – be wary of the hype. I have bit of problem with Telecom in that regard. Their annual report is very good but what they say is not necessarily what they are doing.”
Saint has been scrutinising reports and popping up at AGMs to ask questions for good many years but people have only recently started listening, he says. He has some pretty clear ideas as to what annual reports should include and has both praise and brickbats for the current crop.
Sky City, for instance, has an “excellent section on corporate governance”. However, he’s concerned about its revelation that external and internal audits of the company were both carried out by the same company. “It’s not conceivable there are enough Chinese walls to obscure the conflict of interest that is there. But you have to give them 100 percent for mentioning it in the first place.”
That aside, Saint thinks Sky City has done good job of presenting to shareholders what the company is about. report that is not so forthcoming, says Saint, is Hellaby Holdings. “It’s done reasonably well this year, but if you look at the annual report you won’t find any information about directors – except for their names. There’s not word about their qualifications or what they do. Yet the company includes an insurance component and that’s an industry requiring fair amount of expertise. I’d want to know who is in charge of monitoring its insurance operations.”
Easily accessible information
Many companies seem reluctant to expand on the limited director information the law requires. Saint, on the other hand, believes how and why directors are elected is important information for shareholders. “You have to know about the company’s directors because, at the end of the day, that is where the buck stops.” (More information on what to look for in an annual report can be found at www.nzshareholders.co.nz.)
Whether you start reading from the front or the back probably depends on your role or interest in the company. While some scour the columns of figures, others look for indications of how well the company is governed, or its corporate responsibility credentials.
One of Tisdall’s basic rules for designing an annual report is to ensure key messages can be quickly ingested. “We want the quick flicker who goes through in few minutes to pick up the same core messages from it as someone who reads it from cover to cover. First and foremost is clarity. Messages should be clear, simple and easily accessible. It should be easy to find the information you want. You want to be able to flick through and in two minutes understand what the company stands for, what’s important to them, what’s driving their business and where they’re going.”
Tisdall thinks New Zealand companies are running ahead of their Australian counterparts in terms of producing reports that go beyond statutory requirements to present genuine reflection of company image and culture.
“If you pick up pile of Australian reports and put your hand over the logo on the cover, they’re pretty much interchangeable. On the other hand, the Lion Nathan report [designed by Insight Creative] won an award in New York for the best international annual report – as well as the best beverages. And that was all about bringing corporate pe
