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Annual reports: read all about it.

It’s all too easy to see the annual report as an exercise in statutory reporting, but any company that ignores its potential as a wider communication tool is wasting a valuable opportunity. In fact, many companies don’t even communicate properly with their own shareholders, never mind any other “stakeholder society” readers who might be interested in the accounts. “Too many annual reports fail to describe what the company concerned actually does,” lamented Nigel Macdonald, an Ernst & Young partner who was a highly critical judge at last year’s ICAEW annual reports awards ceremony. “Companies can use the annual report to communicate something about their company, to talk about what makes it different,” says Roger Cleghorn, head of annual reports at design consultancy Thumb. “Companies can talk about what makes them a success and more importantly what is going to continue making them a success.” It’s not surprising to hear a design consultant talking about “corporate brand”, but the concept is all too often given lip-service without being backed up. Take the company mission statement: how often do investors and staff read about a company’s “commitment to shareholder value” or read that “people are our most important asset” without seeing either financial evidence or a corroborating statement in the annual review or accounts? The problem stems, claims Mark Goyder, director of The Centre for Tomorrow’s Company (CFTC), from the routine that companies often slip into when annual report time comes round. “The caricature that I find too often is some rather ‘tokenist’ statements from the chairman followed by a very task-oriented report from the chief executive followed by the statutory financial bits,” he says. “This kind of formula is not built from a desire to seize the communication opportunity.” The CFTC has produced its own report on the annual report called Sooner, Sharper, Simpler to address this situation. Underlying the recommendations – which include subjecting the annual report to a scorecard analysis, for example (see page 36) – is the idea that too few companies properly consider the audiences that actually use their report. Cleghorn concurs on this point: “We like to do limited research to find out what the audiences are looking for from the report,” he says. Take a retail company: a common thread through all the audiences – shareholders, analysts and staff – will be a need for basic facts about the number of stores it operates and the square footage available. This information should be flagged up to satisfy that need. Design can play a vital role in communicating this information. “As designers, we have to make the layout of the numbers very logical – you have to think about spacing and rules and page width,” says Cleghorn. But the FD can also take a direct hand in making the numbers come to life with the operating and financial review (OFR). “The OFR is one of the great successes in the development of the annual report in the last few years,” Cleghorn continues. “It’s where you can get the figures into context.” That makes it a classic place to take advantage of the communication opportunity the report represents. In fact, even the presentation of the statutory accounts can make a definite statement about the company’s commitment to shareholder communication. “If the accounts look good,” says Cleghorn, who always reads a report from the back forward, “nine times out of 10 the review will also be good. The accounts demand a lot of a typographer.” Making the financials clear and helping a range of audiences appreciate the meaning behind the figures is one thing; but often the balance of the report is thrown out by mixed messages coming from different parts of the document. “It’s almost as if parts of the annual report are the domain of the FD and parts belong to the investor relations people,” says the CFTC’s Goyder. “And it’s almost as if the two don’t meet until after the document is put together.” This lack of consistency often happens if the company has had a bad year. On the one hand, it needs to be honest with the investment community about its troubles so as to maintain a degree of trust – but it can go far down this route through the eyeball-to-eyeball contact of a presentation to analysts and journalists, with an open and honest Q&A session. However, when it comes to the annual report – the company’s own printed word – there are always pressures to put the right spin on the figures. Sometimes this is a straightforward design issue. Cleghorn notes that bad figures can be better hidden by tables rather than using charts – and even charts, if cleverly converted to a 3D format, can make the numbers look, well, less bad. But that’s not the best way of approaching things. Cleghorn cites British Petroleum’s environmental report as a good example of how companies can tackle bad news responsibly. “You’ve got to take bad news on the chin and people will invest their faith in you for that,” he says. “BP would celebrate their successes and they would tell people about their failures. But they would also tell people what they were doing to make their failures right.” On this point, he and Goyder agree: a company must be prepared to take the long view in its report, to tell people how it will continue to add value in the long term. And facing up to problems in a constructive way adds to that process. One company which has faced a tough year is British Biotech. BamberForsyth, the designer of its annual report, has produced a no-nonsense document which eschews the clever and goes straight for the jugular on the first page with the chairman’s statement. “You don’t want to wear sackcloth and ashes completely,” says Mark Wilson, director of interactive communications at BamberForsyth. But following high-profile problems, you simply can’t hide the truth. And the reporting environment is different now. “The trend is to communicate more honestly and openly. That has been (because of) peer pressure between companies and also Cadbury and Greenbury,” he continues. But it’s not just the quasi-regulatory environment that has changed. Compare the number of individual shareholders now with twenty years ago: privatisations and demutualisations alone have created a massive new tier of consumers for the annual report, and that has forced companies to add another audience to their considerations. “You have a mixed audience now, which has a common interest in understanding what’s going on today and tomorrow,” says Goyder. This may well be an expression of the “stakeholder society” – which mysteriously seems to have drifted off the lips of the politicians, but is very evident in the Sooner, Sharper, Simpler report – but there are more concrete concepts at work. Goyder himself is dismissive of one solution to this new consumer of reports. “I find the pop versions (of reports) extraordinarily unsatisfactory, because they just seem to lift whole pages from the long version, but they make no better fist at explaining what’s going on,” he complains. Cleghorn insists that alternative versions can meet the problem of defining your audiences. “One annual report cannot be all things to all people. You have to decide the focus early on – in the case of the utilities, for example, it’s the small shareholder with the short form annual report.” This raises an interesting point: if you have hundreds of thousands or even millions of shareholders, is it worth giving the full document to every one of them? “Is there an argument for a shareholding threshold below which you don’t get the full annual report, you simply get a cut-down version of four pages?” Cleghorn asks. “If you’re honest about it, a lot of small shareholders would be happy with that.” Bear in mind, he says, that many of the private shareholders will get a majority of their investment information from the financial pages of the Daily Mail. Indeed, the professional investment community is also probably badly served by the annual report, which must come to many as either patronising or redundant. Mark Goyder feels the preliminary results leave the small shareholder at a disadvantage, since they may not hear the figures until their annual reports come much later. Wilson concurs: “There is this feeling that the private shareholder is being hard done by because the City and the press hear (the results) on the day of announcement and the shareholder, who actually owns the business, has to read them in the media.” One solution to this problem would be to publish the annual report at prelims time. Some companies are already trying to align their reporting procedures more tightly, with BAA leading the field. Tightening the timetable also means there’s a closer relationship between prelims, the annual report and the AGM, enabling a far more effective dialogue between the company and its owners. And while Goyder still has reservations about the publication of supplementary documents like ethical or environmental reports – “I find them a bit painful when they’re totally unrelated to the annual report,” he says – these do allow each audience, each type of “stakeholder,” to be addressed more directly. The logical conclusion of these trends – more timely reporting, more historical context, greater detail for specific audiences – is to use electronic delivery systems – either CD-Roms or the Internet. BamberForsyth’s Wilson sees the Web at the bottom of an information triangle: “If you take the annual review as the top, most of the information people want is touched on there,” he explains. “But it’s about digging down into other levels, so you might have some of the financials in there. The full accounts could be available in the annual report. But the Web site could have all the in-depth information ready for downloading.” This idea seems to have become accepted wisdom. Cleghorn says, “The Internet can carry layers and layers of detail. It doesn’t replace the paper report, but you can build a Web site over time to include historical data in all sorts of formats.” In other words, every different audience can get exactly what it wants, whether that be pretty pictures of the company’s overseas assets or hard data from the p&l over 20 years. And Mark Goyder is happy because the annual report itself can be much more attentive to publicising a company’s achievement of strategic goals. “The danger is that people see the annual report as an end in itself,” says Goyder. “It’s not a repository for all that dialogue (with stakeholders), but it is a starting point.” Cleghorn stresses that the designer’s job is to push boards into a more communicative and unified stance: “Our job isn’t just to make the pictures look good and decorate the pages,” he points out. “It’s to actually understand the company, to try and help them develop the brief for the annual report, to challenge their prevailing perceptions from an objective standpoint.” In other words, the annual report is more than just a statutory requirement; it’s an opportunity to communicate, to educate and to motivate – it’s a company milestone, not a millstone. TOMORROW’S ANNUAL REPORT SCORECARD The Centre for Tomorrow’s Company report, Sooner, sharper, simpler … , presents an inclusive seven-point scorecard for annual reports and accounts: 1. Purpose and values as the basis for leadership Does the company clearly state its purpose and values up front? Highest scores come where the purpose and values are clearly stated and reflected throughout the document with effective measurement of the extent to which the values are lived throughout the company. 2. Success model and the basis for measurement Does the company clearly set out its success model (“the components of the success jigsaw”/the ingredients for success)? Highest scores apply where the report makes use of a clear model or recipe (whether based on a balanced business scorecard or model of the company’s own) in demonstrating linkages between performance in each of its relationships and the financial results. In addition, the design of the whole report should reflect the underlying success model; and if possible, the report uses original and relevant new measures of success such as learning, knowledge management, supplier relationship measurement and so on. 3. Progress in key relationships – the foundation for future results Does the company include customers, employees, suppliers and community among the components of its success? Does it, as an integral part of its account of its stewardship to shareholders, offer a coherent account of the progress which it is making in each of these relationships? High scores come for reports with a coherent framework of reporting the linkages between each relationship and the overall success. Further marks derive from the report using original and relevant forward-looking new measures of success such as learning, supplier relationship measurement and so on. Maximum points for evidence of dialogue between company and stakeholders in the development of the most relevant measures of success. 4. Licence to operate – the basis for continuing legitimacy Does the company show its community, its regulator and the media any evidence for the value it is adding to the community, thus enhancing its licence to operate? High scores for a coherent policy linked to the company’s values. Extra points for measures based on the Business Excellence Model, London Benchmarking Group or similar patterns, and all the detail separately available supporting reports. Highest marks for evidence that the measurement is linked to a process of dialogue with stakeholders about what future policy, goals, measures and reporting should look like. 5. The annual report as part of the total communications process Highest marks for cross-references to other sources of information about the company, details about how other information can be obtained, evidence that dialogue is taking place and top marks for contact details of key people. 6. The annual report as an account of the board’s stewardship over time Good marks for rigorous comparison with previous year’s stated targets and honest admission of targets not met in a full OFR. Further marks for the report containing forward-looking indicators and an interpretation of what these mean for future performance. Highest scores for reports containing a review of previous interpretations of forward looking indicators and a revised interpretation of the company’s success model; and the ability to assess, in one document, the character of the company and its leadership, its progress against previous years and prospects of sustaining that progress. 7. Clarity Marks for the document being in plain English and communicating the big picture in words and graphics, and the style and content of the communication saying something about the character of the company. Highest points for showing signs readers feedback.

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