Those heavy envelopes that every year drop into the mailboxes of Ma and Pa investor or mount in weighty piles on the desks of stockbrokers, financial analysts and journalists have an important story to tell. But how well do annual reports perform as a communication tool for the enterprise? And do they tell the full story?
The increased focus on good corporate governance has shareholders demanding greater disclosure as to how a company is being run, exactly who's doing the running--and who's checking the veracity of the performance. Transparency is the new watchword and consequently annual reports are getting fatter and more detailed.
More disclosure is the most noticeable trend in annual reporting, says Mike Tisdall, managing director of Insight Communications. "The corporate governance sections are getting bigger each year and there's a much greater emphasis on going beyond traditional annual reporting structure to really convey what makes the company tick."
Investors are increasingly wary of corporate reports that, while technically correct, fail to provide a true picture of organisational health and future prospects, warns international accounting firm PricewaterhouseCoopers.
PWC is promoting what it calls "ValueReporting"--a framework that provides a more detailed picture of how well management is implementing its strategies and reporting on non-financial value drivers and intangible assets. Framework headings include sections such as a market overview, value strategy (eg, goals, organisational design, governance), value creating activities (eg, innovation, brands, people, customers, corporate reputation), and financial performance including commentary on issues such as risk management.
The approach helps build shareholder confidence to know whether a company is satisfying its customers, retaining employees, responding to market dynamics of living up to claims of being a good corporate citizen. After conducting some global research on annual reports last year, PWC found that for many companies it was a case of "all mouth, no trousers"--claims of corporate responsibility lacked evidential support.
Tisdall cites Waste Management as a company with a good story to tell and, because it doesn't have a high profile, its annual report provides a good opportunity to tell it. "It's a very good company in terms of their integrity in what they do and nobody knows much about it--the annual report carries the weight of that communication."
Under a "think again" catchphrase, it explains how the company turns rubbish into raw materials, how its landfill functions as an energy source powering 1400 homes, how it transforms organic waste to compost and waste oil into a reusable commodity.
He believes the PWC approach of building the reporting structure around business value drivers deserves a strong future. "If clients adopt the notion, it means they're cutting to the chase and communicating material that directly impacts on their performance."
Sky TV and Meridian Energy are examples of companies that have identified factors central to the success of the business, then built the report approach around these, says Tisdall Sky's performance as a company is measured against its key success factors of strong programmes, loyal subscribers, robust technology, passionate people and increasing profits.
This more toward greater company introspection and disclosure is making the annual report a more effective communication tool, says Tisdall. "In the past two to three years, there's been a resurgence in companies wanting to use their annual report to speak to relevant audiences about what their organisation stands for--its culture, key messages, that drives the value of the business."
Tisdall has been helping companies design effective communication strategies since the heady pre-crash days of the mid-'80s when share investment was at an all-time high and glossy reports were weapons in the competition for shareholder funds. …