Annual Reports: Are You Publishing a Frankenstein’s Monster of Information?

 

Richard Ketchen

By Richard Ketchen

What do Bank of America and HSBC have in common, besides being banks? Monster annual reports.

HSBC’s 458-page annual report for 2006 thudded onto the doorsteps of shareholders weighing in at just over three pounds. The report was so heavy that the UK’s Royal Mail limited the number its workers were allowed to carry, to prevent back injuries. By 2009, the HSBC report had bulked-up to 504 pages, including 90 pages of risk disclosure. Bank of America is just a slim cousin by comparison, with a 220-page annual report for 2009 and 165 pages for 2006.

Lengthy annual reports such as these moved the Institute of Chartered Accountants of Scotland (ICAS) earlier this year to propose that managements of public companies be required to produce shorter annual reviews. Describing the traditional annual report as “a Frankenstein’s monster of information,” the ICAS aims to tame the beast while ensuring that it communicates the most important aspects of performance, strategy and risk. The goal: an annual review of 20 to 30 pages.

Rethinking the Beast

The idea isn’t new. Annual reviews or summary annual reports have been around for years. Indeed, HSBC produced a more reader-friendly annual review comprising a mere 52 pages for 2006 and subsequent years. Bank of America, on the other hand, last produced a summary annual report for 2005.

What is new is a professional organization, one that some might link to the root causes of monster annual reports, saying that enough is enough.

In its report, Making Corporate Reports Readable, the ICAS says that annual reports have become too complex and focused on compliance, rather than providing useful information to stakeholders.

“It’s clear that something radical must be done,” commented Hugh Shields, chairman of the ICAS Corporate Reporting Task Force and Head of External Reporting for Deutsche Bank—itself no lightweight in the corporate reporting arena, with a 436-page annual report for 2009.

Shields added that, even though annual reports are intended for a number of different users, at its heart, financial reporting is about effective communication with investors.

I would argue, however, that annual reports are increasingly a reporting tool for stakeholders with an appetite for more than financial information. That’s one reason for the rising interest in integrated reports that include environmental, social and governance (ESG) reporting.

Providing a Multi-Layered View

Shareholders are now the “beneficiaries” of more financial and risk disclosure than they could ever have believed possible. Yet, annual reports that run to several hundred pages often fail to tell the reader a compelling story. So, the ICAS recommendations are welcome.

Some North American companies already publish both a short annual review and a full-length annual report. That practice, however, is limited. In Canada, for example, only 13% of the 207 companies that comprised the TSX Composite index in 2009 produced an annual review, according to my Online Annual Report Study. Those reports averaged 27 pages in length, compared with 101 pages for a full annual report. Similarly, a 2008 study by the National Investor Relations Institute (NIRI) showed that just 12% of the US companies surveyed published a summary annual report.

The proposed ICAS summary report isn’t intended to replace the full annual report and financial statements. It would instead use alternative reporting technologies, such as XBLR and HTML formatting, to give readers online access to more detailed information.

With the full annual report and financial statements still available, the summary report would provide an uncluttered view of the business, its business model and how it makes money. Better still, it would give readers more choice—they could opt for the high-level summary or dig into the numbers as they pleased.

Reporting Benchmarks for a Clearer Story

The ICAS report includes several proposed benchmarks to help companies tell a clearer, shorter story. Those include:

· Maintaining consistency with the full annual report.

· Explaining the business model and strategy, and linking that strategy with performance.

· Setting out the management’s stewardship of the company’s assets (the past), the current asset-liability mix and liquidity position (the present), and where the company is headed (the future).

· Providing online access to detailed disclosure and regulatory information.

· Reporting historical cash flow and liquidity information in ways that are meaningful to both management and stakeholders.

· Avoiding repetition while providing all-important information.

The recommendations are aimed primarily at UK companies, but they are also applicable in North America.

The goal is to achieve a clearer of view of performance and to tell the management’s story. The guidelines would also help eliminate much of the boilerplate material that pervades annual reports, which in itself is a major step to achieving relevance and clarity.

The onus, however, is still on management to avoid producing a cluttered, piecemeal document that lacks organization and narrative flow. And that includes eliminating meaningless reporting of governance, environmental and social responsibility activities that merely recite policy and describe trivialities.

Providing Better, Not More, Information

Most annual reports are long enough. The best way to create an annual report that’s less Frankenstein’s monster-like is to offer readers better information, not more information. I suggest you start with these considerations:

· Establish communication objectives. Formalizing the purpose of the report will help focus its structure and narrative.

· Resist the urge to follow the leader. Think independently to establish the content of your report before looking to other reports for ideas.

· Make informed decisions. Take the time to understand whether certain disclosures are material or relevant.

· Measure effectiveness. If you don’t have reader feedback from a published report, seek comments from an informed first-time reader. And consider a reader survey for future reports.

Companies that take stakeholder reporting seriously already understand that effective communication is a sign of good leadership and a means of building trust. What are you doing to show reporting leadership in your company?

Richard Ketchen is a freelance financial writer and communication specialist. He draws on more than 20 years of experience to help clients produce sharper, clearer, simpler communication for stakeholders. Richard can be reached through his website, http://richardketchen.com.

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