Annual reports: out of print?


One provision of the Companies Act 2006 is that it allows companies to
publish their annual reports primarily on their websites. Lobbied for mainly by
companies with large share registers, this regulatory change is intended
primarily to save the cost of large print runs of unwieldy documents. But in the
rush to make these savings, two thirds of the FTSE 100 are missing the point.

The first companies to take advantage have already changed their company
articles and are at this moment preparing to ask their shareholders to
positively ask for print or default to completely electronic communications.

This is great if you have 100,000 shareholders and you really do not care
whether or not they stay aware of the company, its management and its issues.
Fortunately for the private shareholder there are not many companies that think
that way.

Most companies are aware that they need to find new ways to keep the private
shareholder engaged in the company. Cynics argue this is because management
needs a loyal shareholder base in its own defence. More practically, company
managements are aware that they benefit in many subtle ways — from growing
market share to regulatory issues – by having well-informed and engaged

One of the key tools in this new electronic communication era is the online
annual report – the most visited part of investor relations websites other than
press releases. Recent research we conducted among shareholders found that 100%
of analysts and 60% of private shareholders visited company online annual
reports as a matter of course to seek key facts and a clear overview of the

Our study rated the online annual reports published by every FTSE 250
company, to May 2006, to see how they have developed from the previous year.
Have online reports got better at delivering the key facts? Have they improved
in the way they clarify the business? Have the necessary techniques been applied
to reports as the principal face of the company, to really engage shareholders?

Ratings are based on indices of ‘best practice’ (structure and content) and
what we term ‘engagement’ (good use of the internet to communicate). With these
indices we asked if companies provided all the tools recommended by the Investor
Relations Society, but also, whether reports were structured to get the facts
and the company story to stakeholders.

The results are not encouraging. In their 2006 reports, less than 40% of FTSE
100 companies satisfied even the most rudimentary of the IRS’s best practice
recommendations, and even the best have significant room for improvement. The
worst are shocking. Trying to find facts or background information in a 100 plus
page PDF of the report is equivalent to phoning an investor relations number and
being hung up on.

Problems aside, there is a lot a company can do through its online reporting
to greatly improve its relationship with shareholders.

The greatest challenge of any annual report is to communicate complex
information within a readable narrative, simultaneously satisfying the demands
of the professional investor, the retail shareholder and the more loosely
affiliated stakeholder.

Although narrative reporting would seem to favour printed documents where one
page follows another and a complex story can be explained at great length, few
individuals actually read an annual report from cover to cover. Reporting online
can help bring a transparent structure to the report by turning one extended
narrative into a series of focussed, issue-led reports within a report.

The pages of an online report have no fixed order. Information is accessed
only through the links and menus provided. Through intelligent structuring of
these menus every user can find exactly the information they seek, while at the
same time access links to supporting and comparative data. It is in this way
that online reports can improve access to information as well as understanding
of the business.

Better focus

By identifying specific themes and treating them individually, each section
will be significantly more focussed. Intelligently designed menus can allow
instant access from business review to non-financial risks to a sector specific
concern, rather than the reader having to read through the business review until
they find the relevant sub-heading.

Fostering understanding is at the heart of all forms of shareholder
communication. Any opportunity to clarify how different parts of a company’s
business connect should therefore be wholeheartedly embraced.

As the Business Review becomes more complex, it is more important to provide
links between narrative statements in the review and the relevant financial
statements. Pages can be linked directly, financial notes and statements
referred to instantaneously and cross-references made easier. The length of
annual reports can only continue to grow as companies become more comfortable
with the requirements of the business review – the challenge is to ensure that
the additional, valuable information being made available is not locked inside
an unwieldy document.

Investors, both professional and private, tell us they use annual reports in
two distinct ways, to get a fact quickly or to browse and get a sense of the
company’s strategy, position and opportunities. The first is easy to achieve in
a well-built site, based on full HTML coding, with helpful navigation and
reasonable search capabilities. The second can be done better online than in
print by grouping a set of links together on the front page.

Take Man Group’s 2007 report for instance. Not a word is used that is not in
the audited report but it provides several ways of accessing the information to
suit both modes of use, including the ‘five minute read’.

While few UK investors admit to using webcasts, podcasts and the like, some
companies are using these technologies in, or near, their online reports to
brand or illuminate;. Rolls Royce highlights its key strategies with Flash;
Aviva’s CEO speaks when you click on his image; and Signet has a useful
demonstration of its range of store brands on both sides of the Atlantic, which
are expensive to experience in other ways. All these techniques and more can
contribute to the engaged and informed stakeholder every company needs.

Satisfying statutory obligations online can certainly be cheaper. The risk is
that companies will disenfranchise and lose contact with shareholders. In fact,
reporting online can be a great deal better than in print. To save the money
just requires a little more thought.

Jonathan Hynes is a senior partner at smiths.interactive, part of the
Smiths Partnership

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