Company reports: an annual struggle

The job of producing the annual report gets harder every year. Communicating
with shareholders who differ greatly in their knowledge and financial
sophistication is tricky enough.

Now, legislators are exerting greater control over what is disclosed and how,
with the influence of non-governmental organisations more noticeable in their
attempts to control narrative reporting. The task of balancing the competing
requirements of compliance, relevance and readability becomes ever more onerous.

But, in our view, the current legislative approach to corporate reporting
shows a worrying loss of perspective. The government has focused all its
attention recently on controlling disclosure through the annual report. But this
intense focus on a single

document overlooks the fact that it is just one part of the overall
interaction between shareholders and companies and one that has limitations, as
well as strengths, as a form of communication.

Institutional shareholders do not use the annual report as a significant
source of information about company strategies and prospects, and few retail
shareholders elect to receive the full report anyway; where possible, they opt
for the annual review instead, a document that is, ironically, lightly
regulated.

Contrary to the government’s stated aim of improving the annual report to
generate ‘increased, high-quality shareholder engagement, current legislation is
in danger of making the annual report even less readable: far too long, far too
complex and, with the eventual enactment of the narrative reporting requirements
of the companies bill (formerly known as the company law reform bill), far too
anodyne to be of real use.

The other problem is that the annual report is only printed once a year.
Regardless of governmental encouragement, or coercion, companies will remain
rightfully wary of making forward-looking statements in a medium that rapidly
dates, preferring other, more current channels.

If the government had really wished to encourage ‘candid, experimental
reporting’ it has paid insufficient attention to the other channels companies
use when reporting to their shareholders.

Reporting restrictions

When the companies bill is enacted in 2008, recent amendments to the clauses
covering narrative reporting mean that the ‘business review’ will be only
slightly less prescriptive than the operating and financial review and a far cry
from the ‘OFR-lite’ that it is currently portrayed as. Indeed, there is a good
chance that eventually, ‘reporting standard 1’ will become a mandatory
requirement once again.

But the prolonged period of confusion about narrative reporting does
highlight that the legislative approach is not the most effective way of
improving how companies talk about their strategy, performance and prospects. No
matter what becomes mandatory, the reality is that good companies will continue
to seek ways to improve their reports, and poor ones won’t.

Those companies that do wish to strive for improvement will soon find that
regulations and standards are not sufficiently helpful. The more fruitful
approach will be to look at how other leading companies tackle the fundamentals
of good communication in a progressive and innovative way. Getting into good
habits now will pay dividends in the future.

When what a company says in an annual report becomes a matter of law, then it
won’t be long before the lawyers do the talking: useful as they can be, nobody
is suggesting that candid and experimental reporting is their preferred
approach. That doesn’t mean that such reporting is impossible and it certainly
doesn’t mean it’s undesirable. But companies that are passionate about effective
shareholder communication will need to look beyond the regulations and, quite
likely, look beyond the annual report, to do so.

FIVE GOOD HABITS IN ANNUAL REPORTING

Make it easy to read
If an annual report tells a story, many current examples have all the
clarity and coherence of Joyce’s Ulysses. A logical and simple
structure, clear signposting and an easy to read layout are essentials for any
report.

Explain yourselves clearly
Never underestimate the capacity of your audience not to know your business, or
if they did, to have forgotten what they learnt. Take the time to explain – up
front – what you do, and where and how you do it, in a clear and concise
fashion.

Avoid repetition
Repetition is a common affliction of the annual report. The chairman offers up
the highlights of the year, which are then repeated by the CEO and, often, the
CFO.
The operational review then bangs home these key facts and figures once again.

Employing a strong-minded external editor to weed out these tiresome repetitions
will be a good investment.

Keep it simple
Beware the complex strategy. Companies should be able to articulate what they
want to achieve, and how they intend to achieve it, in two pages at the most.

Disclosing how the company has performed in pursuit of those objectives will
take up more time, but then, strategy and execution are very different things.

Exploit alternative formats
With reports getting longer and harder to read, their value as a
communications tool is diminishing. The annual review or summary financial
statement provides the ideal alternative for companies that want to use an
account of their performance as a selling point. The corporate responsibility
report gives scope to discuss sustainable and ethical policies in a relevant
way. This allows the annual report to function primarily as an exercise in
statutory compliance.

James Brock is a director at Addison Corporate Marketing