CorpComms Magazine

Ten years ago, when investors were passive and corporate governance merely an abstract concept, BP's annual report was just 90 pages long. Similarly, eight years ago British Aerospace's (BAE) annual tome measured 72 pages. It was a novella rather than a blockbuster, but the dull contents meant these dry and dusty documents were destined to be thrown away or filed on an out-of-reach shelf, never to be read.

A host of government regulations has changed all that. Within four years, the annual report of BAE Systems, as the company became known, had grown by two thirds to a whopping 117 pages of detailed information for shareholders to absorb. Last year it hit 134 pages. Meanwhile, BP, which has transformed itself into one of the UK's most profitable companies, now educates its investors with a door-stopping 228-page annual report weighing almost three pounds, heavier than a bag of sugar (though still only about half the weight of a new-born infant).

Of course, there are now far more pages of financial information, remuneration details and the minutiae of directors' shareholdings and long-term incentive plans. Indeed, the notes to the accounts alone can form well over half a standard annual report as UK PLC embraces the new culture of transparency.

Vital statistics?
But it is not just finances that are shared with readers: annual reports now contain a wealth of information on issues as diverse as waste management, energy use and staffing levels. Changes introduced as part of the Companies Act 2006 now mean corporations are forced, in the name of transparency and openness, to include the kind of data most investors have never even thought about.

For example, BP's most recent document contained details of its greenhouse gas emissions, its 'contributions to communities', employee satisfaction levels and, perhaps bizarrely, the DVDs, targeted emails, intranet sites and magazines it uses to communicate with its 97,000 workers.

There was even information on the programmes BP runs 'to raise our senior managers' awareness of diversity and inclusion'. The company highlights its annual review on its corporate website with the sentence: 'BP is reducing complexity, improving consistency and changing behaviours.'

And BP is far from an isolated example. BAE shared figures on its energy use with its investors, as well as detailing the amount of waste it recycles, the gender, age, and ethnicity breakdown of its workers, and the amount of 'volatile organic compound emissions' - whatever they may be - that BAE Systems produces.

Not to be outdone, banking group Barclays even found enough space in its 302-page annual report, with its fetching photograph of a freesia on the cover, to inform shareholders how many of its staff were classed as having a disability. Indeed, its operating review looking at the group's financial performance, risk factors and accounting details is now marginally smaller than its governance section.

The simple life
It is no wonder annual reports are getting so long. But while corporate transparency is undoubtedly a good thing - few people would hark back to the days when shareholders were seen, not heard and, like mushrooms, kept in the dark - can there be such a thing as too much information?

The answer is yes, according to Roger Lawson of the UK Shareholders Association, which represents retail investors. 'It is very clear that many small shareholders don't read annual reports, particularly those of FTSE 100 companies,' he says. 'They usually get thrown in the bin because a lot of what is in them is just a distraction. You get lots of obfuscation and very little meaningful information. There needs to be much more simplification.'

Lawson believes most shareholders, both institutional and retail, want a 'meaningful chairman's message - one that contains the financial position of the business, the risks the company faces and the outlook for its prospects. Certainly, if you look at the annual reports of banks and insurance companies, for instance, you are likely to be overwhelmed by too much information that is very difficult to interpret for retail shareholders.'

In the past, companies have been reluctant to provide too much guidance for fear annual reports would be seen as marketing paraphernalia urging consumers to buy their shares, leaving them potentially liable to lawsuits further down the line. The Companies Act has sought to guard against such a situation arising, prompting the inclusion of better information.

The good life
As for information on CSR issues, Lawson says he regards it as a 'total waste of time. If you read the reports of the oil companies you would think they are cuddly beings doing their best to save the planet when we all know it's not like that at all. Nobody believes it.

'There is a place for corporate and social information but I think it is probably best in a separate document where people can read it if they are specifically interested in it. The problem you have is that companies use this kind of information not necessarily to inform shareholders but for their own public relations purposes.'

Tim Steer, fund manager at New Star Asset Management, is equally scathing of annual reports, describing them as 'total propaganda documents. Most of the information in them is just another example of government interference in business. Most of the CSR information, for example, is of interest only to around half a percent of the shareholders in this country, who want to feel they are investing ethically - but it doesn't turn me on.

'The annual report is unlike any other document. You have to start at the back. Page one should be page 121. The important stuff is in the notes - that's what I'm mostly interested in, because it is the place where companies usually try to hide the bad news.'

Many feel that in the drive for more transparency, firms have simply flooded reports with details and avoided responsibility for explaining why this information may be important - leaving investors struggling to fend for themselves when trying to make sense of it all.

Wood for the trees
Perhaps one of the most difficult aspects of putting together an annual report is that one document must satisfy a broad range of needs from a diverse set of shareholders. As a result, the reports can contain far too much detailed information for some investors, yet provide little in the way of a strategic overview for others.

'I don't think many people sit down on the sofa at home with a mug of cocoa and read an annual report all the way through,' comments David Paterson, head of corporate governance at the National Association of Pension Funds, whose members control assets in excess of £800 bn.

Paterson accepts that by trying to be all things to all people, annual reports may prove satisfactory to none. 'These reports are certainly getting longer,' he says. 'They are aimed at a very diverse group of people who like to look at different parts of the document. The analyst community, for example, will be looking at the financials and the notes to the accounts.

'But these reports are primarily there for shareholders. If you are a banker, an analyst or a trade unionist, you can probably get the kind of information you are interested in from a company in a different way. You probably have better access or don't actually need to wait until the annual report is published.'

Paterson echoes the view of smaller shareholders that an increasing amount of information provided is meaningless. 'I think there is a risk that companies are supplying information of a kind that is just not relevant to the long-term performance of the business. It's unnecessary - and it doesn't get read,' he notes. 'If you are looking at the gender make-up of employees, for instance, you have got to ask yourself whether that is relevant to how the business is being managed in your long-term interest as a shareholder. Personally, I would say it is quite marginal, although I am sure there are those who would disagree.'

Andy Brough, co-head of the Pan European Smaller Companies Fund at Schroders Investment Management, is not one of them. 'We have got to the stage where the postal workers are limited by the number of reports and accounts they can take out at any one time,' he says. 'The world truly has gone mad. Do we really need all those pictures of board members? Most accounts now are almost impossible to analyse because there is so much information. There is too much guff written.'

The good old days
For pension funds, whose fiduciary duty is to ensure the payment of their members' pensions, the primary concern is to look at potential returns rather than social issues. Fund managers, many of whom specialise in corporate governance, environmental concerns or ethical investing, often take a different view.

For them, the information on CSR is crucial, and numerous attempts have been made over the years to draw a correlation between good corporate, environmental and social practice, and stock market returns. The FTSE4Good Index, for instance, was set up for exactly that reason.

Many others, however, believe the link is tenuous at best, including Ebba Schmidt, the consultancy services executive at shareholder lobby group PIRC. 'Including such information is quite a step forward,' she says. 'But there remains the question of whether it actually has any influence on financial performance. It is telling a story - but not necessarily the whole story.'

For David Myddleton, professor emeritus at the Cranfield School of Management, investors would be far better served if annual reports went back to the old days of providing simple and succinct financial information in 20 pages or less. 'All you really need are the details of the directors and a simple financial statement of income and expenditure,' he says.

And Brough agrees: 'We should go back to the days when you just had a chairman's statement and a set of accounts. That's all you need.'

'I dispute the idea that people use annual reports to make investment decisions,' adds Myddelton. 'The new standards are based on pages and pages of regulations that produce pages and pages of waffle. I have been looking at annual reports for 50 years; if I don't understand them, I doubt anyone will.'

As the season for annual reports rolls around again, it is perhaps time for companies - and regulators - to go back to the drawing board.
 

Red top highlights underperformance
Companies that consistently fall out with shareholders over executive pay and boardroom structure perform less well than those with corporate governance practices supported by investors, according to new research from the Association of British Insurers (ABI). It found firms with the best governance practices produced returns 18 percent higher than those with poor governance records over a four-year period.

The ABI traditionally issues a 'red top' warning when it has governance concerns about a company. The research, which studied 654 FTSE All-Share companies between 2003 and 2007, found the number of years in which a company receives a red top is strongly correlated with its performance.

Each annual red top reduces the industry-adjusted return on assets by one percentage point a year. The worst offenders, which were red-topped in every year, underperformed the average industry-adjusted returns on assets by between three and five percentage points annually.

'Our members' interest in governance has always been driven by their desire to generate value for policyholders over time,' says Peter Montagnon, head of investment affairs at the ABI. 'The results confirm our belief that good governance produces better returns with less volatility.'

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