Best practices for online annual reports. (Investor Relations).

Despite a rapid rise in the number of investors receiving shareholder materials through electronic delivery, most companies neglect their online annual reports. They could be missing out on a big opportunity to save time and money down the road.

Coming in the first reporting season since the Sarbanes-Oxley Act of 2002 was signed -- signaling more attention from investors and regulators -- this year's annual report is an especially important one for most companies.

Yet, while companies are engrossed with their auditors dotting i's and crossing t's, recent international research by Blunn & Co. finds that -- while more annual reports are being delivered and consumed online than ever before -- companies are doing a poor job publishing online. They are ill-prepared for good online disclosure and need to do much more to make their information easier to use.

It is conservatively estimated that more than six million investors, mostly in North America, will receive their annual reports electronically in 2003. Lisa A. Hendrikson-Loesch, director, marketing at ADP Investor Communication Services (ADP-ICS), notes that her firm alone has enrolled about 4.3 million investors to receive annual reports and proxy materials via the Internet, up from 3.5 million in May 2002. And, the number is expected to swell this year as ADP targets investors by deploying ads for e-delivery on popular retail Web sites like Yahoo-Finance. ADP estimates it has about 95 percent market share in the U.S. and Canada and a growing profile internationally where online delivery is less established.

The boom in online delivery is a blessing in disguise. It is saving companies money, but it also means they have to pay attention to what they're doing online. For example, most companies use the quickest approaches for publishing annual reports electronically. These tend to be cheap and easy for the company, but often not user-friendly for the shareholders who've elected to get the report online.

Regulators, like the U.S. Securities and Exchange Commission, are seeing the Internet as an important part of the corporate disclosure netowork. In its recent rules shortening disclosure windows for annual and quarterly reports, the SEC encourages companies to post key documents on their Web sites in parallel with their formal filings to the commission.

The SEC has also expressed the opinion that companies should pay attention to the formats they use to make information available on their Web sites -- that the formats companies use "should not be so burdensome that the intended recipients cannot effectively access the information provided."

Poor format choices can be costly

By not putting more effort and time into their online reports, firms are also compromising the clarity of their message and the ability of shareholders to learn important information. At the same time, companies often view the electronic version of their annual reports as an "additional cost," when the reality is closer to the opposite.

Good online reports are an investment- that will drive future cost savings and help improve investors' appreciation for a company's strategy and future prospects. An analysis by ADP-ICS estimates that companies can save around $1 on each report and proxy delivered electronically. The average annual report print run is 92,000 copies, according to a 2002 member survey by the National Investor Relations Institute (NIRI).

Formats that work best online

There are five main ways to publish annual or other printed reports online. Only one method is preferred in terms of an ease-of-use and effective communication. Two are satisfactory under certain limited circumstances, and two should be avoided.

Starting with the worst, here are the pros and cons of each:

Single PDF Blobs:

The worst option and the least user-friendly.

When the print annual report is converted into one big PDF file, it's not uncommon to see PDFs weighing in at 4 megabytes or more. A file this size will take about 10 minutes to download over a 56KB modem, which is still the dominant consumer access speed. That's a long time to wait, as research by corporate governance consulting firm Rhoda Anderson Associates LLC shows that the average annual report or proxy is viewed for only three minutes online.

Usability research shows that many people won't download large PDF files when they're looking for information. Most also still do not know how to use the Acrobat Viewer required to view PDF documents. And some complain about PDFs freezing their computers.

PDF files are also difficult to move around in or read from. Although navigation can be improved by tweaking the original document, most companies either aren't aware that they can do this or apparently don't care. Even with additional navigational support, big PDF files like annual reports, which average just over 50 pages each, aren't as easy to use as a plain Web page.

It's obvious that these problems, and others, make PDF blobs something to avoid for online annual reports. Yet, a survey of 100 of the world's biggest companies, drawn from the S&P Global 1,200, found that more than 30 percent of these prominent companies used PDF blobs as the only format for their reports.

Image-Based Reports:

Bad usability; could exclude audience segments.

Once seen as an attractive way to publish annual reports online, these should be avoided due to their poor usability. Some of the many problems of this format include:

* Inability to copy text and numbers from the report for use in other applications, like a spreadsheet or word processing program -- something analysts and others need to do.

* Poor image quality makes text grainy and hard to see on a screen, using standard type sizes.

* Inadequate and slow navigation and generally poor search results.

Dr. Jakob Nielsen, a principal of California-based Nielsen Norman Group, argues that seniors are most disadvantaged by the format. This is because many seniors, and even some people in their late forties, need to increase the text on Web pages and flow it to their screen size in order to see properly, and the format doesn't allow that. Blind people aren't able to use the format at all because the software they use cannot read the format.

Blunn & Co.'s survey found that only four companies used image-based reports -- The Gillette Co., Procter & Gamble Co., Dow Chemical Co. and BP plc. However, this scarcity is unsurprising because image-based reports were new in 2002 and not yet well known. By 2003, vendors will have had a full year to market this format, so the potential is that a higher number of companies will make the mistake of using image-based reports.

PDF Families:

An acceptable minimum standard.

Rather than load an entire annual report into a single PDF blob or use an image-based report, a better approach is to offer smaller PDF files of each of the report's main sections. This lets people download and access just the section of the report they want -- such as the MD&A, the Financial Statements and Notes or the Letter to Shareholders.

Even the smaller files in a PDF family should be enhanced for navigation by using bookmarks and links in the text and financial tables. The PDF family works best when companies have comprehensive Web sites that they manage actively. Their low-key nature should be offset by other stronger features and more current information on the site.

However, for those with a Web site that is not actively managed and that have always used a PDF blob, this is the bare minimum to do with the current annual report.

Flash Reports: Great for visual learning but often misued.

Flash is a technology for developing animation and other applications on the Web. It can be very effective and powerful as a visual communications tool. It has potential to more effectively communicate important information to individual and employee investors.

But Flash is a difficult technology to use correctly Designers tend to use it for marketing-type applications that don't provide useful information to investors and slow down their use of the report. It can also be slow to download, difficult to navigate and impossible to copy - especially if the entire document is coded in it.

Putting all of this together, Flash should be used only in small doses and only where it can add value to the experience of the person using it. Flash can be quite effective, for instance, for producing interactive charts and financial statements that can help retail shareholders understand the significance of the numbers they are reading. It can also be used for interactive timelines, schematics and flow charts, but always only in combination with standard Web text.

Good Flash work is time-consuming, and requires extra planning and precise execution. This is why it is more costly than other formats. However, for companies with a large retail investor base, the expense of tactical Flash use may encourage more people to accept online delivery.

HTML Reports: The best option

HTML is the standard format for the Web. It is a text-based format that allows linking to other pages in the report, on a company's Web site or on the Internet. Most things can be done with HTML that any office productivity software can do. It's fast, flexible, doesn't require special software, and a skilled writer can make it an effective format for delivering and consuming information on the Internet.

Companies have generally underused HTML because it can cost more than PDF or image-based formats, depending on the level of skill and customization documents require. Yet, in the hands of skilled producers, HTML documents often are better communications tools than their print counterparts. Companies that want a usable HTML report but don't mind using a standardized template can get an HTML annual report for as little as $3,000. According to a recent NIRI survey, the average budget for online annual reports is around $7,400.

Template-created HTML annual reports all use the same navigation interface, which may detract from a company's brand image. However, this can be alleviated somewhat with some minor design customizations like matching colors and text styles to the company's own.

Choose what works for the end-user

The increasing role of the Internet in securities disclosure gives new import to how companies choose to post disclosure information on the Web. As a first step, it may be prudent to conduct a full review of the company's current online investor relations and corporate governance disclosure. Such an audit will identify key gaps and opportunities for the company to take future action on and help in formulating a good plan of action.

In the rapidly expanding age of online communications, the stakes are high for those who fail to tell their company's investment and governance story effectively. On the other hand, those who do rise to the occasion will gain a strategic communications advantage and enjoy the spoils of lower costs and a more accurate valuation based on a better understanding of their business by their investors -- and potential investors.

Dominic Jones ([e-mail]) directs the online investor relations consulting activities of Blunn & Co. (www.blunnco.com), a Toronto-based investor relations communications firm.