CorpComms Magazine

Even in buoyant financial markets, few corporate communicators look forward to the task of writing and designing the annual report.

This may remain the most important document that companies publish about themselves every year but, at its worst, it can be unbearably dry and unwieldy.

It is also tempting to think that major shareholders know most of the contents anyway, while all that often interests the media is the remuneration committee's report detailing directors' pay, bonuses, options and pension entitlements.

Yet investor surveys suggest that annual reports are well read by investors and, of course, there are statutory requirements concerning their publication and contents. The question is what to say in them when most of the news is bad (or definitely not as positive as it once was), as is the case in the current economic environment.

Should annual reports, in the words of the famous song, simply 'tell it like it is'? Or is it time to be unrelentingly positive and pretend that nothing untoward has happened?

It is an issue that is concerning communicators who have noticed some companies pulling away from traditional levels of disclosure.

'What you will see is that a number of companies will retreat and disclose less,' says Kevin Bruce, director at branding and design communications agency 85Four, which produced 43 annual reports last year for companies including brewers Greene King and department store chain Debenhams. 'Some of the smaller financial services companies are not saying an awful lot more than they have to.'

This trend has also been noticed by Neville Wells, corporate reporting director at Likemind, a corporate communications agency that produces annual reports for clients including British American Tobacco, Yell Group and brewer SAB Miller,

'You just have to look at the annual reports of the banks,' he says. 'The banks are drawing in their horns and there's a tendency not to say so much.'

Cohesive messages

However, Barclays' annual report for 2008 was longer than the previous year, and included more extensive coverage of the business and market risks that the group faces.

There are degrees of disclosure, of course, ranging from minimum statutory requirements, such as the need to include financial statements with the appropriate accounting and auditing treatments, to the style and tone of the chairman and chief executive's message and of course the cover itself. The message on the front of HSBC Holdings' recent annual report is 'Strength, diversity and resilience'.

In good times, some companies go to extravagant lengths to project an image. Insurance group Hiscox, for example, once published its annual report in the form of a boy's comic book annual. Many groups treat them as marketing documents.

But in anxious and uncertain times, leading communicators says gimmicks and razzmatazz can backfire badly, while going to the opposite extreme of hitting investors with lengthy, detailed compendia of information can be just as bad. The crucial element, they say, is working out what the key messages should be and getting them across coherently.

Victoria Wheelwright, business development manager at corporate design and communications agency SAS, says: 'This is something we've been talking about a lot recently. Investors have been saying that they want to hear from companies but what they really want to know is, Are you going to survive? They don't really want companies to be totally transparent. It's about perceptions and messages. I think there needs to be a really delicate balance.'

Several agencies have felt the need to find out more about what investors really want from annual reports.

Last year, SAS commissioned research from Thomson Reuters, asking 50 institutional investors what they did not like about the documents. The results, says marketing and research director Jason Frank, uncovered cynicism among some investors who felt that the chairman's and chief executive's statements were 'probably written by public relations people' and 'did not give them a genuine insight into what was happening at the company'.

He adds: 'What was interesting was how many investors read annual reports. Some 95 per cent of investors said that they do read them - almost as high as the percentage for the financial statements.'

Not the kitchen sink

Likemind's market research focused on what institutional investors wanted from annual reports. 'The top six requirements are clarity, transparency, honesty, materiality, consistency and perspective,' says Wells.

'I think the materiality point is why companies are saying less. Businesses are turning away from the approach of putting everything in and leaving it to the reader to sort it all out and work out which parts of it they want.

'What's important is relevance and it has to be fresh. People don't want the same as they read last year.'

'The issue of trust kept coming up,' says Mark Hynes, investor relations consultant at Radley Yeldar, which recently completed an investor survey. 'That's what investors want to know. Can they trust the company they are investing in not to let them down? What is coming up that may change things over the next year and how is the company preparing to adapt?'

Then there are private shareholders, on whom agency 35 Communications, the producer of annual reports for Diageo, Tesco, Cadbury and Centrica, focused its research.

It asked 500 people with shares in more than two companies to highlight what they wished to see more of in annual reports.

Their answers, says managing partner Thom Newton, pointed to a demand for more direction about trends in the companies' industry sectors as well as strategic information demonstrating their money to be in safe hands.

'There's a need for companies to be clear and transparent about how they're going to work through these difficult times,' he says. 'And online, shareholders want more frequent communication and more active dialogue.'

So how can annual reports adapt to the times? Wells says they can be more detailed about what they see as the risks facing companies. 'People always think that the bit in the annual report about risk is about risk for the investor but it's also about not achieving your strategy,' he says. 'There's a lot more interest in that these days.'

Frank believes annual reports should focus on messaging through their tone, consistency and awareness of what their customers want. 'They need to be externally driven,' he says. 'Too many annual reports do not focus on what is on customers' minds.

He recalls working on the annual report of Ericsson in 2001 when the Swedish group was going through a difficult time following the dotcom crash.

Tailor messages

In that environment, the messaging in the annual report about the company's change of direction since putting its mobile phone handsets manufacturing operations into a Sony Ericsson joint venture was a key part of repositioning public perceptions, he says.

'We simply asked 30 investors what their five key questions were for management and these became the focus of the annual report,' he says.

Similarly, after new chief executive Justin King arrived at supermarket group J Sainsbury, Frank says the pressing question from the supermarket group's 300,000 investors was what the new broom was going to do.

'We knew exactly who read the annual report,' he says. 'It was 45-year-old women who shopped through the range and were articulate and intelligent but didn't want to have to wade through the whole thing.

'They wanted the key message and that was that there was going to be no major change but that Justin King was going to change 1,000 little things that would together make a difference. That was the vision communicated through the annual report. You need fewer words, clear messages and normal language, not jargon.'

Hynes believes annual reports are becoming even more important to investors because of a failure by sell-side analysts to publish meaningful research on companies outside the FTSE 350.

'Clearly, a big theme of the year is risk so whatever companies say about that will be examined with great interest,' he adds.

'But annual reports should also be about opening  up lines of communication. They should enable discussion and allow stakeholders to ask stupid questions.'

Three points

Richard Carpenter, managing partner of creative communications agency Merchant, says there are three issues to consider when publishing annual reports in uncertain times: what should they say, how should they look and feel and what should they be communicating online.

His answer to the first question is to be absolutely forthright, while the second can sometimes require careful positioning.

For example, Merchant's recent annual report for property group Hammerson, which has been ravaged by falling asset prices, was printed entirely in black and white.

'It had a more sombre mood,' he says. 'The company had a tough year, as did the rest of the real estate sector, but it is making its way through it. The annual report has been very well-received.'

The online issue is a bit like the point about overindulgent print versions of annual reports, he says. 'There's no point spending lots of money on expensive video streaming in online annual reports at the moment. It just looks inappropriate but I'm sure it's what will happen after this recession.'

Bruce adds: 'It comes back to what each company uses its annual report for. Some companies use it to get across their corporate responsibility message. Others use it for marketing and stakeholder communications. Whatever the purpose, the key is to use it efficiently.'

'I think it's important that it should say something about the strategy for the future. The change in annual reports over the past five years is they have become much more strategic. Macro-economic conditions affect all companies but what investors really want to know is a company's strategic direction. You need narrative and you need to pay attention to tone. You should tell the story rather than running around making sure you have ticked all the boxes. That's how you gain credibility.'

There are other trends too, not least the movement to publish annual reports online. The Companies Act of 2006 allowed companies to make online publishing on their websites the default option as long as investors receive emails or letters alerting them to the report's publication. Investors who want physical copies then have to request them.

Chris North, chairman of branding and reporting consultancy FHD, says this has led to some companies producing so-called 'super-summaries' - separate documents that are free of regulatory compliance constraints but summarise corporate strategy messages.

In an uncertain environment when budgets are carefully managed and every word from chief executives and chairmen is scrutinised carefully by fund managers and analysts, he sees this message-oriented approach winning an increasing number of followers.

'You should not confuse two things when it comes to annual reports,' he says. 'There's a difference between style and substance. It might be absolutely inappropriate to produce a high-gloss, highly-illustrated communications document for a company that's struggling but similarly it is absolutely imperative that you articulate a company's key messages.

'In past recessions this might have meant that your print documents became less glossy and more informative but the difference in this recession is that I think it will accelerate the move towards more online reporting.

'Our client Invensys did a super-summary last year. It gets the message across. The key thing is presenting the message well and making sure that all the information is there for investors to turn to.'

Direct approach

Most commentators agree that it is best to face the issues head on. Brigid McMullen, managing director of branding and design agency The Workroom, says that can deliver a powerful message.

She recalls producing an annual report for water group United Utilities at a time when a much stricter new regulatory regime was being introduced.

'The response of the chief executive was that going on with business as usual was not an option so that was what we called the annual report.' she says. 'It's about taking it on the chin and being very upfront. Telling it like it is has to be the best way to deal with things.' 

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