Financial scandals may have dragged communication up the corporate agenda, but Europe's leading companies are actually doing a worse job of relating their performance through their annual reports. Peter Prowse says evolution - not revolution - is the answer.
The world of annual reports is rapidly changing. On the one hand, companies are under increasing pressure to report electronically, and use the internet to spread their financial information throughout the world. On the other hand, changes in reporting methods are afoot as a result of suggestions from accounting bodies and accountancy firms about the relevance of financial information contained within annual reports.
The nature of shareholders has changed. Long gone are the days when the annual report was produced for accountants, by accountants. Thanks partly to the growth in individual shareholders – estimated in the UK at more than 16 million people – it has a far higher profile.
Consequently, companies, their accountants and design consultancies are re-examining traditional financial reporting methods, with some arguing that the current format of the annual report will slowly wither and die.
But while new forms of reporting corporate information are inevitable, companies are in danger of taking their eyes off the ball.
An analysis of company reports from Europe’s top 100 companies by communications consultancy Prowse & Co has found that this year – for the first time in 13 years – companies are actually doing a worse job of communicating their corporate performance to shareholders through the pages of their company reports.
‘Lacking innovation, poorly structured and, at times, woefully designed, the majority of this year’s reports give the impression of being simultaneously under-resourced and undervalued,’ says the survey’s author, Matthew Grenier.
‘In attempting to placate the fears of their stakeholders, many companies appear to have forgotten the fundamental rules of effective communication.’
Where are they going wrong? The report, published last month, found that most companies, in an attempt to respond to the impact of accounting scandals and new legislation, have crammed as much information into their reports as possible, often to the detriment of readability.
European reports often include references to the impact of the Enron scandal. Companies in general are referring extensively to corporate governance issues, with 85 of the 100 companies giving detailed profiles of their directors, and 79 outlining directors’ remuneration policies.
Many chairman statements offered general acknowledgement of the extraordinary events of the year. These range from UBS’s ‘the Year 2002 was one of the most challenging ever for the financial industry’, to Ericsson’s ‘we all know these are difficult times in the telecommunciations industry – probably the worst in history.’
But while their statements may demonstrate a positive, personal style, too many appear to have been written by ghostwriters. At the opposite extreme, others tend towards bland, uninspiring statements.
The analysis also highlighted the tendency for chairmen to criticise government policies or legislation. Electrabel and Lloyds TSB are two corporations that blame their governments for their poor profits performance.
This raises the question of whether the company report is the most appropriate vehicle to air these views?
The quality of copy has not been helped by a decline in creativity and production values, seemingly contradicting claims made by the companies about how they are innovative enterprises.
For a long time, annual reports from US companies have been setting the benchmark for communications effectiveness. Annual reports from European companies need to reflect some of the lessons learned from across the Atlantic, and become documents that interest and excite, rather than slowly bore to death with tables and inscrutable figures.
So change is most definitely on the cards, although evolution, rather than revolution, would be the more likely scenario. It might be the case that all investors receive detailed financial information as an email when the preliminary results are released.
In this case, the annual report would become an archive document, sent to the appropriate authorities and filed away in a suitably located warehouse.
But even in this scenario companies will still need another document, one that is less reliant on reporting financial information and instead concentrates on the real assets of a company – its people, knowledge and stakeholder commitments.
Criticism aside, there have been some memorable reports. This year’s top three performers are German insurer Munich Re, British Energy company BP and Swiss telecoms company Swisscom.
Amid some memorable artistic touches (photos of gardens of the world in the UBS report), sometimes it’s the matter-of-fact statements that make the biggest impact.
Take, for example, the chairman of AXA, whose sentiments many others must surely have agreed, but felt unable to communicate.
‘It is ironic that, as talk of sustainable development grows, the world’s financial markets appear to be more than ever engaged in short-term and short-sighted thinking.
‘After the enthusiasm ushered in by the new economy, we are seeing stocks – often those of businesses with excellent medium and long-term prospects and a secure future – being massacred in the marketplace. And in the ensuing panic, those involved are behaving in more lemming-like fashion than usual.’
CREATE A GREAT READ
From its analysis of best practice, Prowse & Co have come up with a nine-point formula for producing an effective report: