By Maureen Wolff, President and Partner
Annual reports are so 1997.
When the National Investor Relations Institute recently asked me for my thoughts on the public company practice of producing a glossy annual report, the premise of the question was not, “How can companies do this better?” or “Please provide some helpful tips for designing annual reports.” It wasn’t even as minimalist as “What’s the least expensive, most simplified way to produce an annual report?” No, the question was much more fundamental: Why, in this age of technology and pressured IR department budgets, should companies bother to create an annual report at all?
We have come a long way from the heady days of the late 1990s, when investor funds flowed more freely and companies put a premium on investor marketing. In those days before Notice and Access, investor relations websites were more a novelty than a necessity, which put the onus on IROs to communicate with investors using traditional print campaigns.
But two recessions and several more stringent regulations later, IROs are looking for ways to increase efficiency and control costs, and that means that for many companies, the traditional printed annual report, whether a full glossy spread or a more slimmed-down 10-K wrap, is destined for the chopping block.
It doesn’t have to end this way, though.
The Securities and Exchange Commission issued its Notice and Access rules governing Proxy dissemination back in 2007, phasing in implementation during a three-year period. Now, a majority of the time, companies make use of the rules to push stockholders to go and look at their website. Because of this, investors are spending a lot more time with the online annual report, which really gives companies some flexibility. Investors are able to read through other places on the website, enabling companies to convey a more cohesive message. It’s not just limited to what we used to call the “Operations” section decades ago, when we viewed the annual report as much more of a marketing document.
Even in the face of current trends, each year, several companies still produce glossy annual reports. For those companies that are willing to spend the money and invest the time, they are looking at the annual report as a true marketing document. Other companies are experimenting with video. Still others are using a combination of a printed book and a video, so that when investors go online, the CEO actually reads the shareholder letter. That can be a good thing, because investors are always looking to see the whites of the eyes of CEOs and get to know who’s really running the company.
A video is not the only way of doing that, of course. I think we could all probably take a page from Warren Buffett – not that we’re pushing for 20-page shareholder letters, but I think it’s good to look at the annual report as something that is very different from the other materials we produce in IR. For example, with quarterly earnings conference calls, the focus is on the quarter and they typically may look up to one year out. With the annual report, though, companies can look three to five years out and communicate their strategic vision. Where is the company going? What does it want to be when it grows up? What are new areas it might be getting into? Annual reports also provide management the opportunity to talk about corporate culture, which you don’t really get to do on the quarterly calls.
I remember back in 1998, when Ernst & Young published its “Measures that Matter” study that analyzed the importance of a company’s non-financial metrics to buy-side investment decisions. At that time, E&Y’s survey showed that 40% of a company’s investment appeal was not on the balance sheet. So, the annual report, shareholder letter and other accompanying information are a unique opportunity to focus on some of those non-financial measures, examining the company’s strategy, the quality of its management team and market trends. Annual reports let management talk about challenges and strengths – the way that Warren Buffett does in his annual letter to Berkshire Hathaway’s investors. He talks about what went on that was good, what went on that was bad, and in what areas the company may be lacking. Really, the annual report should be something that gives us a more strategic view, versus talking only about what went on during the past year.
This is probably the best the way to view the report’s value: How does it fit in with all of the other communications that we’re conducting?
In the end, we’re all trying to figure out the best methods to reach stockholders, and we have to remember that there are many different ways of getting to them. In the current environment of increased shareholder activism, shouldn’t we be communicating more actively with investors, rather than pulling back under the guise of cost control? No matter the medium, the annual report is a significant means to do just that.
Maureen Wolff is president and partner at Sharon Merrill. Maureen leads the implementation of the firm’s strategic vision and provides high-level strategic counsel to clients. She is a past chairman and board member of the National Investor Relations Institute (NIRI) and a current member of NIRI’s Senior IR Roundtable. She also is a past president and honorary director of NIRI’s Boston Chapter.
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