02/04/2015

Annual reports are dead: Long live the annual report

BY Simon Lake

It’s all been said before, many times by anyone who has ever had anything to do with an annual report: annual reports are dead; they are too long; they are unreadable; they are expensive; they are spin; they are confusing; they should be online; they should be in real time; they are technical; they are irrelevant. Even, they are too heavy.

Many have tried to improve the annual report and the challenge has been to improve the relevance to users, mainly investors.

Everyone knows there’s something to fix, but there’s not a lot of agreement about how to go about it. Companies are left with a confusing mass of requirements to make sense of and the impossible challenge of trying to keep all their stakeholders informed.

Recent modifications have seen the introduction of a strategic report that includes a business model to show how the organisation makes its money, an analysis of risks to the strategy and what resources and relationships the company needs to fulfil its goals. And there is an enhanced governance report outlining how the company is governed and how performance is linked to remuneration.

All of these changes have been made with the right intentions: to make the annual report more joined up, comprehensive and worth the time and money they cost each year to write, audit and publish, either in print or online.

Let’s be clear; the contents of annual reports are important to many people, in an organisation and outside of it. They are a document of record as well as a manifesto or business plan of where the business is going and why its performance across a range of criteria, financial, environmental or social should be believed.

Where else can you find this narrative all in one place? Online, but probably all over the place as a result. The problem is that so many constituents – government, investors, lawyers, regulators and auditors have got at the annual report over the years in the name of progress, that its relevance has been undermined. There is a cycle of continuous and overlapping improvements, but as everything is open to interpretation and all companies are different, the annual report has slowly lost its position as a powerful piece of communication.

Companies spend hundreds of hours and thousands of pounds, developing their reports, but very little time or money investigating if they have spent their money wisely.

Given the investment, you’d think it worth checking whether users find it useful; this is surprising given that people tend to stay away from things they can’t understand, such as listed companies.

Requirements provide a framework within which companies need to report but they should tailor their communications so that the result is meaningful information for their investors (and other readers of their report). A well organised and developed report is usually a sign of a solid and well-organised company  with a good idea of what it’s trying to achieve.

Reviewing the developments over the last 10 years or so, it seems to me that increasing guidance has helped the narrative and structure, but missed the point: Annual reports are most of all about communication, but as the number of retail investors has declined over many decades, this focus for communication has been lost.

The effect is that companies assume serious investors need to be spoken to in a serious, technical way. In more cases than not this leads to relentless, impenetrable presentation and disengagement.

So what can be done? Perhaps, if the content and narrative were more challenging and linked more directly to practical influences that were more easy to relate to, reports might become more relevant and engaging and help build reputation and understanding, rather than obscure it.

It is possible to work within the current frameworks, regulation and guidance and get good results. But having said this, I think there is content to be included that would really help publishers and readers:

1) Talk about competitors and how they shape strategy: What are the competitors up to and what does that mean for the organisation? What makes the organisation different from its competitors and why does management feel these differences are important to its future?

Most annual reports never talk about a competitor. It’s as though they don’t exist and have no influence on how the company behaves. One client of mine looked me in the eye 10 years ago and told me they didn’t have any competitors. All they talk about now is their challenging competitive environment.

2) Examine the marketplace in detail and include a definition of market size and the market share of the organisation: How much of the market remains untapped and why is the strategy designed to ensure that share increases?

3) Analyse reputation across various criteria and amongst different audience types: Has it risen or fallen, what are the reasons and how is reputation managed across markets?

4) Talk about targets: Where does management see the company in 1, 3 or 5 years? What are they striving for? How is success or failure defined? What are the influences on the organisation and the markets in which it operates that will make these targets achievable? At the moment, most annual reports have key performance indicators, a sort of dashboard of performance, but these are not the same as targets. KPIs are backward looking, but investors want to know how management thinks the company will perform in the future.

5) Analyse the importance of employees: Their salaries and taxes are one of the largest outgoings in any business so their value needs understanding as they deliver the strategy: How are they are motivated and trained? How many are new? How many stay and grow with the company over what period of time? Where are the shortages and are the right graduates being attracted that will help the company evolve? What is the culture? How are they looked after?

6) Show what went wrong in the year and what has been learned as a result: Everyone makes mistakes and companies are no different. They make mistakes all the time although they are not usually called mistakes. But mistakes they are. Companies should devote time to what they could have done better and why the same mistake will not be repeated. In other words, is the organisation capable of learning or does it simply bury its mistakes and move on regardless?

7) Make a clear statement of belief: This is a tricky one, but trust is vital to all companies. It’s the glue that binds them to society, to their customers, to their promises and to their employees. So why can’t this be spelt out by the chairman or chief executive by describing the five reasons society should believe in us. It would be interesting to see what ideas were developed.

There are many reasons why companies would not be able to make all these improvements, top of the list being confidentiality and the fear of giving too much away. But in this age of constant scrutiny, most information is available somewhere. The annual report, or the narrative it carries, presents an opportunity to take control of a difficult communications environment by giving away more by writing less, as opposed to the endless narrative that is the norm. And by going further than the statutory requirements, and talking to audiences in a way that avoids too much brain-ache, companies just may be more clearly understood. Long live the annual report!