By Terry McWilliams
•
01 Aug, 2022
By TERRY McWILLIAMS Want your next annual report to be horrid? Design a cover so bland, so devoid of substance that it threatens to induce reader narcolepsy. Put as many words as you can in the chairman’s message. Make the sentences really long. Say as little as possible about things that didn’t go right. At the same time, ask employees for digital photos. Their pictures are not only homespun – they’re free. If you do these things, experts say, you’ll have created a document that will have shareholders and the financial community wagging their tongues with colorful language of their own. That’s not the way it is supposed to be. Most companies spend significant amounts of money and time to create these self-administered report cards. For whatever reason -- poor planning, misguided advice or rancid execution – many publicly traded companies produce failing annual reports. All too often management falls victim to one or more of the following Seven Deadly Sins of annual reporting. Deadly Sin 1 -- Flat, uninspired writing “Our objective with this annual report is to offer you detailed information on the conduct of business and the results achieved by the company in 2002.” That’s the Chairman’s opening sentence in the Spanish utility Endesa’s annual report. It’s an example of many reports with banal chairman’s statements that lack personality and underestimate reader intelligence, says Matthew Grenier, who has analyzed reports of the top 100 European companies ranked by the Financial Times . “Sometimes the writing seems to be designed to make the reader close the annual report and walk away,” observes Rebecca McEnally, director of capital markets for CFA Institute, a non-profit organization that administers the worldwide Chartered Financial Analyst program. Long sentences and multiple dependent clauses play havoc with clarity and understanding. Sid Cato knows this first hand. His newsletter critiques annual reports and highlights trends. He penalizes reports with sentences exceeding 16 words, the length professional writers strive to achieve. Long letters also draw Cato’s wrath. He castigates the 23-page letter to Cinergy utility shareholders – a letter six to eight times the worldwide average length – as a reflection of the CEO’s “massive unbridled ego.” An annual report can be glossy, have dramatic graphics and artistic photography, “but it’s a failure if it reads terribly and the investment story lacks impact,” says Martin Hennessey, managing director of The Writer agency in London. “The truth is, a failure to invest in the words is generally a false economy.” Deadly Sin 2 - A boring cover The cover sets the stage and the tone for a company’s report. If it doesn’t lure the reader inside, it has failed. “A cover gets someone to read on, or put it down,” says Suka Design’s Susan Karlin, a New York design agency that produces both corporate and non-profit reports. A cover should grab a reader, be provocative, say something unique and reflect a strong, convincing theme – far more than a rote recitation of name and year, she says. Companies reporting a less-than-stellar year don’t necessarily have to feature “dancing and singing” on their annual report cover. “But make it interesting,” says Richard Carpenter, writing consultant and development director-corporate reporting for Radley Yeldar. Deadly Sin 3 -- Hiding the story Nothing infuriates the investment community more than hiding information or skipping around tough issues. That’s the most common mistake companies make, says the CFA’s McEnally. “It’s simply failing to provide information that people need, and obscuring critical information. Eventually investors find out, and that’s when the lawsuits start. Companies and management fare better in the long run if they are forthcoming,” she says. The European fashion company Vivat Holdings diverted attention in one risque annual report by publishing a photo of a topless woman next to its financial statements. The report didn’t set well with financial commentators or shareholders. Vivat now doesn’t exist as a publicly traded company. In such cases, management sometimes thinks “they can pull the wool over their audience’s eyes. They don’t really care what the outside world thinks,” says Hennessey. Deadly Sin 4 -- Misleading charts and graphs Figures don’t lie, but they can create the wrong impression. Bars in charts can be flip-flopped. At first glance, they can suggest fortunes are rising rather than falling. Large percentage changes can be softened or magnified by changing the starting point on the bar scale. Some companies cherry pick charts for inclusion in good years, but not in bad ones, Carpenter says. Deadly Sin 5 -- Hyperactive design (and its evil alter ego, lethargic design) Overactive design can confuse readers. With its many elements – copy, graphics, photography – competing for dominance, the eye can bounce off the page. The reader is finished trying. In one instance, Sid Cato thought his cat’s hairs had fallen onto the page of an annual he was reviewing. He quickly learned the “hairs” were designer-placed thin curved lines. He’s seen a number of annoying graphic devices – arcs, upside-down type – and yearns for designs that are “clean, inviting and user-friendly.” “Clean” doesn’t mean “bland,” as was the case for one of Gallaher Group’s annual reports and financial statements. “I know the tobacco industry is controversial, but the company’s apparent wish to avoid offending anyone has lead to one of the greyest reports ever,” says Hennessey. Orange S.A.’s report wasn't much better. Investors received a plain Word-like document, with no photos, no chairman statement, no graphs, “and no attempt made, it appears, to engage the reader,” says annual report analyst Matthew Grenier. This from Orange, he says, a “perceived leader of brand communication.” If only more companies’ reports were basic, wishes the CFA’s McEnally. “As a fundamental analyst, I would be delighted if annual reports were plain and not a lot of money was spent on glossy paper and expensive photographs,” she says. “Overdesign, underdesign – that’s a balance you have to strike,” says designer Karlin. “You want to direct the reader and not make him or her struggle. Time is limited. You want to pull them in, hook them, and provide texture to keep them.” Deadly Sin 6 –Type from Hell Poorly used typefaces can stop a reader cold. In Wallace Computer Services’ annual, Sid Cato found that white type on a silver background tended to obscure information -- “especially in a financial highlights listing showing a falloff of net income.” Many type problems occur in the footnotes. “A key problem is increasing amounts of regulation – companies are trying to squeeze additional content into the same space, keeping costs down so they don’t have to print a larger report,” says Carpenter. Thus, companies resort to tighter line spacing and smaller type. The CFA’s McEnally suggests putting narrative information into tabular form where possible. Deadly Sin 7 – Myopic use of photography Digital photography has changed the landscape, says photographer Benjamin Chapnick, president of New York-based Blackstar. Anyone and everyone with an iPhone is an expert. Because amateurs (typically employees) don’t have experience in lighting a subject, framing and composition, backgrounds, thematic development and so on, they produce digital images that are inconsistent and obtained at “no cost.” Images can be corrected to a certain extent, but the power of a professional’s trained eye can’t be replaced. Photography should advance the theme while building the corporate brand, Carpenter says. “Why skimp on doing it right? It makes the company look cheap. If that’s the image the company wants to convey, fine -- but it’s a false economy.” Sometimes purchased photography leads to problems. Designer Karlin remembers when the same stock image showed up on the annual report covers of two technology competitors. “Be original or both will look bad,” she says. A final word At best, poor reports can lose readers, experts say. At worst, they damage corporate credibility and reputation. Good or bad, the annual report look, feel and message is ultimately the CEO’s responsibility. “An annual report is the number one opportunity to really create a positioning for the company and to set itself apart” with a compelling investment story, says Debbie Mitchell, former NIRI chairman and senior managing director of IR at Dix and Eaton in Cleveland. The biggest sin may be squandering that opportunity. (Photo credit: U.S. Geological Service.)