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How do you play the annual report game?

how do you play the new annual report game?

Corporate America spends a reported US $5 billion each year on the annual report. Yet opinion is divided on who the annual's readers are. Perhaps because it hasn't settled on the annual's purpose. Corporate America also doesn't know how much the annual is read. Nor has it conducted recent research on the kind of information users are looking for.

But what else should one expect, when the annual report is being pushed and pulled every which way? By the Securities and Exchange Commission. By the globalization of business. By increased competition. By the leveraging of corporate America. By tight budgets. And, very important, by the institutionalizing of the markets.

The big dust-raiser in this year's annual report sweepstakes appears to be Time Warner. You either love this report or hate it. (See sidebar.)

But innovative reports are often the result of individual work by corporate and design executives. According to a 1986 study for the Financial Executive Research Foundation by David and Barbara Hawkins, "Little is known about how contemporary managers, professional investors, individual investors and non-investors view the report." They cite as an example of contradictory and outdated research findings the oft quoted fact that the average investor spends less than 15 minutes reading an annual report. This is from a 1972 study by Georgeson & Co., they say, reporting the views of two-thirds of the stockholders surveyed--no analysts--at a time when annuals were "meager ... little more than financial statements and some brief supporting narrative," and when "small stockholders were more interested in [looking up] dividends."

Data today are still outdated, David Hawkins says. Despite some Hill and Knowlton surveys in the 1980s, major content research has been dormant for years. The only new research has been on annual report budgets, although basic content data can be found in Sid Cato's Newsletter on Annual Reports.

What's happening to annual reports then? Here is a round-up of comment in four areas: the audience, the content, the international scene and the future. It is not a survey. It reaches no conclusions, at most pointing out directions that research may wish to explore.

Is the Audience Changing?

Bill Dunk, who runs his own investor relations firm in New York, recalls how annual reports were pitched in the '70s to a retail audience and to financial analysts on Wall Street. "Now," he says, "the annual is no longer a retail document. The pitch is to investment managers at institutions, whose needs are different. They're buying the industry as much as the individual stock." Says colleague Gregory Pettit, "You want to reach to portfolio managers on the buy side. Not the analysts, but the guys who make the actual decisions on your stock." The institutions of these managers reportedly own 54 percent of the Standard and Poor 500.

In addition, companies today are highly leveraged. "With debt often standing out more than equity," adds Hill and Knowlton's Ned Raynolds, "the annual can't ignore the debt holder, either."

How do you reach this changing audience of financial professionals? Dunk and Pettit claim portfolio managers "want to know about your markets and industry trends." They foresee the up-front review of operations collapsing into the Management's Discussion and Analysis (MD&A) and being replaced by an essay about one's industry. They cite Syntro's 1987 report. The tiny biotech company was losing money and had no product, but it produced an annual that examined biotech in the animal health industry, and got noticed, says Pettit, "because portfolio managers couldn't afford not to read their AR."

On the other hand, companies don't print hundreds of thousands of their annual reports for just a financial audience. The annual has "a very important marketing function. You're packaging performance," says Deborah Kelly, producer of award-winning Quaker Oats reports. Beyond investors, she cites employees, recruits, suppliers, clients, lenders and the SEC. But how is content weighted between marketing and investor relations? There is no consensus because there is no research, even when the answer would determine how to focus the content: the analyst vs. the portfolio manager, the portfolio manager vs. the prospect.

However, for knowing what it wants, you can't beat Continental Bank Corp. It ran four versions of its annual report cover, each version featuring a bank customer from a different part of the country. Bank officers will use the report as a marketing tool for targeted audiences. Such aggressiveness is more and more common today, when money is tight and competition is tough.

Is the Content Changing?

"Annual reports show the terrible consistency of people copying each other," says designer Martin Peterson, who produces the Graphics annual report annual. He does suggest that in times of tighter budgets, companies may be afraid to stand out. But he also believes that annuals do "need to show consistency each year, the same image of the corporation. Why compete with yourself each time?" Bill Dunk agrees. "You're dealing with an investment manager now, who may have 25 reports on his desk. Repetitive, low-cost graphics is a smart approach. You want consistency of color, of look, so your report is identifiable from year to year."

One model of consistency for three years has been the usual but award-winning Trenwick Group annual report. In typewriter type, it features a similar message each year from the CEO, with "hand-drawn" highlighting and colored dividers between each section. After considerable growth and diversification, explains designer Frank Lionetti, the company wanted to get back to basics as one of the three largest independent reinsurance companies. "As we talked we realized streamlining wouldn't work in a glossy piece. Back to basics meant the work should have a look of not being designed or produced."

The typewriter type mechanicals came right out of the in-house laser printer. A red pencil highlighted copy in the first report, then Lionetti switched to a yellow magic marker for the last two. He sees a trend of "getting away from design warfare. The answer isn't always bright graphics, but communicating what our clients need to communicate." On Time Warner's report: "I like it."

Content change in the back of the report seems inevitable, despite some corporate resistance. Four areas are now hot. All investors like segment reporting--separate financials for each division--because it enables them to analyze how well each part of a corporation is doing. But on forecasting they differ. Unlike individual investors, who often look for past performance, institutional investors are more interested in looking ahead--not only for shareholder value but also for proxy voting guidance, as institutionsbecome more involved in management decisions. But companies prefer projections to forecasting, since the latter is more precise and opens, in their eyes, the potential for a lawsuit. With SEC encouragement, segmenting and forecasting will eventually become the norm.

The MD&A, says the SEC, is being honored in the breach. Of 358 MD&As it reviewed a while back, 345 prompted letters commenting on inadequacies, producing amendments by 125 companies. The complaint is that these MD&As are doing the commentary but not the analysis, the what but not the why. Should the SEC have its way, the MD&A may, indeed, open up the front of the book for potential other use. Canada, too, this past January, implemented more comprehensive MD&A requirements.

The management review, the assumption of responsibility for financial reporting and the adequacy of internal controls, is increasing in the wake of business failures and alleged auditor misconduct. Of nearly 800 annuals he reviewed in 1988, 44.4 percent contained such a management review, says Sid Cato, the self-described annual report guru. This figure is up from 39 percent. More significantly, 20 of the 22 largest companies now include such a voluntary show of piety, according to Jonathan Schiff, accounting professor at Fairleigh

Dickinson, Rutherford, N.J. The SEC is expected to make such a management review mandatory next year.

Following the crash of '87, annual reports began looking to the past. But now companies are becoming aggressive. "Customers had been reluctant to appear in our annual," says Jim Herzog, manager of financial communication at Armco, the steel manufacturer. "They feared it would imply an endorsement. But now they're in pitched battle with their competitors, and they welcome whatever will show them in a positive light. So, we photograph and quote their people on how we at Armco helped them meet a certain product need. We love it become the analyst wants to know our customers and how strong we are with them. Plus, it's a great marketing tool for new customers."

Two footnotes. 1. Many noted a modest trend toward cutting costs--stock or black and white photos, more design competition, fewer inks or varnishes on press--except among the largest or most competitive companies. 2. The average report length remains at about 38 pages, according to Sid Cato. The quick passing of the summary annual report--with its trimmed financials, absence of notes, greater "clarity," and reduced costs--has left most financial people smiling, while many communication people remain intrigued by a lost potential.

IS the International Scene


Corporate Europe is waiting for 1992. Will a single market and the free flow of capital bring a single currency? Will it bring common accounting standards? "Until we know such answers," says John Ford of Gavin Anderson & Co., London, "we won't know how to present financial information, or management information."

"The internationalization of markets has to move companies away from their past conservatism," says John Moore of Burson-Marsteller, Paris. this includes a reinterpretation of information for US markets, which is happening very slowly, he says. The first step was direct translation. Then came adaptation. Now there is the "international format," which created a style and a look that will work in many national markets and then merely adapts the local text. What remains is the completely new text and design created for a specific foreign market. This is probably at its most advanced stage in Japan, whose companies are hiring US firms to address a US market.

One reason European annuals seem more imposing, says colleague Tony Hughes of Burson-Marsteller, London, "is that our reports have a lot more detail--information on personnel, on plants, on subsidiaries--that US audiences don't find useful." European companies also don't have a 10K in which to put some of the "heavier" information.

Japan, on the other hand, produces annual reports that are just as good graphically as American reports, says Gary Kraut of G.A. Kraut in New York, "but they don't reveal much in the text. They don't have investor relations objectives as we do, because they haven't been seeking foreign investors." But they, too, will move toward fuller disclosure, he says, as they move into the US market--much as Mitsubishi Bank did when it became listed on the New York Stock Exchange.

Meanwhile, what the Japanese are masters at, said GTE's Harvey Greisman at the International Business Communicators Conference in Geneva in June, is using the annual report as a calling card. "Some 800 Japanese companies produce English-language annual reports," he said, "for use in customer, supplier, employee, community and banking relations around the world. They use it as a tool to communicate, to project a global image and convey a stable, progressive company you would want to invest in, and do business with."

US companies, Greisman said, don't produce annual reports in foreign languages "because they believe the investment audience is too limited for it to be cost-effective." In doing so, he said, they are selling short its other potential uses in a Europe that is becoming a single market and is opening up its eastern borders.

will Tomorrow Change?

Focusing on industry issues is a likely move. Many see this as a magazine approach that will make the annual report more readable. "An annual ought to use all editorial and graphic techniques to get the reader into it," says Ned Raynolds. Non-corporate reports have already done so.

The big issue, however, is video. Most executives see the print annual going on forever. Nothing can beat its portability, they say, the ability to pull out quickly any information you need. But Robert Miles Runyan, the Los Angeles designer, whom many credit with starting all this annual report fuss, is now hot on video. "Tape tells you more and can do it more quickly," he says. "You can use it in PR, marketing, employee communication, recruiting and so on. It's just around the corner."

The difference will be made by digital video, believes Aubrey Balkind of Frankfurt Gips Balkind, New York designers. "Ten years from now, the video version will dominate the print version," he says. "With digital video, you'll be able to access information at any point, and get it in the sequence you want. Instead of turning a page, you'll push a button. Up will come a chart, with music and a voiceover. It will be like a computer. You'll have the information on a disk, or you'll call it up over the phone lines from a central bank."

We can see the investment managers now. Some are grimacing. Some can't wait. Research, anyone?

Robert A. Parker is principal, RAP Communications, Nutley, N.J.
COPYRIGHT 1990 International Association of Business Communicators
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Author:Parker, Robert A.
Publication:Communication World
Date:Sep 1, 1990
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