2019: The Decline and Fall of the Annual Report?
The demise of annual reports (ARs) has been predicted for well over a decade – in some cases, with a certain amount of good riddance glee. Not only are ARs painstaking and costly to produce, conventional wisdom is that no one reads them because the disclosures are old.
But as Mark Twain might have said, rumours of the death of the annual report (AR) have been greatly exaggerated. As calendar year-end beckons, IR focus takes a close look at annual reports, where they've come from and where they may be headed.
Annual Reports Back in the Day
United States Steel Corporation is thought to be the first public company to produce an AR that was auditor certified. Issued for the fiscal year ended December 31, 1912 by Directors including J.P. Morgan and Henry Frick, the 55-page report bears some resemblance to a 10-K. It has a generous number of tables chronicling a variety of financial disclosures and, in a footnote, reported that the company had decided that very year to establish a manufacturing plant in Canada.
Another seminal moment in AR history was provided by Walt Disney Productions in 1940. Disney incorporated a personal (and unique for the time) seven-page letter to Disney's 1,800 stockholders boasting of the company's ability to produce "two or more feature subjects per year" but also delivering the news that one of its newest films (Pinocchio) generated just over $1.6 million at the box office but cost $2.6 million to create. Disney also used what we might now refer to as strategic messaging to assuage fears about the challenges and risks faced because of World War II.
Annual reports changed again in the 1980s and 1990s as public companies sought to stand out with themed, colour covers, lengthy feature sections and promotions. For reference, see International Business Machine Corp's 1994 38-page AR front section and mail-in coupon offering readers the chance to receive IBM's first "interactive" CD-ROM annual report. At that time, the AR was considered the cornerstone of an investor relations program and budget dollars were abundant. Then came the Internet and the AR seemed doomed as the information it contained appeared weeks earlier on SEDAR (established in 1997).
Don't Look Now but Some ARs are Even Bigger Today
As it turns out, the Internet did not kill the AR. IR focus scanned the most recent annual report practices of 30 large-cap and mid-cap issuers chosen at random (and across industry sectors). This past year, ARs in this cohort were, on average, six pages longer than in 2016. This hardly supports the view that annual reports are going the way of the buggy whip. Some of the more elaborate ARs were produced by Entertainment One, RioCan REIT and Alimentation Couche Tard.
However, for the majority of annual reports, much of the extra content is contained in the MD&A and Note disclosures. Compared to 10 years ago, the front ‘marketing’ sections of many (though not all) annual reports have been rationalized. Common front section features that survive include:
- message to shareholders (which, if well constructed, can serve as the ensuing year's reference point for key corporate messages);
- financial and operating highlights tables;
- brief business profiles; and
- sections often named ‘Our Competitive Advantages’ or ‘Our Value Creation Approach’.
More companies are incorporating CSR messaging into the CEO's letter or as a feature of their ARs. They are doing so even if they simultaneously produce separate Sustainability Reports or Public Accountability Statements, which many do. Why the message overlap?
IROs contacted by IR focus offered two reasons. One, CSR messaging is important to shareholders, and two, there is no way of knowing which corporate report a shareholder will study, so it's advantageous to repeat some of the core messages across platforms. There is also a regulatory push. The TSX’s 2014 Primer for Environmental and Social Disclosure pointed to the CSA’s 2010 Staff Notice 51-333 – Environmental Reporting Guidance, noting that “while the Staff Notice did not specifically address social information, it can be interpreted to include material social information, since disclosure requirements in the [AIF] and [MD&A] cover all material issues”.
To underscore the importance of CSR reporting, the Morgan Stanley Sustainable Signals Survey published on June 13, 2018 noted that approximately 25% of the world’s professionally managed asset managers now have some sort of sustainable investing mandate. Without reporting on CSR policies and procedures, Canadian public companies run the risk of being shunned by responsible investors.
Notice and Access Proving to be Unloved
Notice and Access enables issuers to use the Internet to provide meeting materials to securityholders. As Broadridge states: "Issuers can expect to realize reductions in print and postage costs. There is also a positive environmental impact from the reduction in producing and delivering large quantities of material."
Ironically given the stated CSR priorities of many public companies, comparatively few take advantage of Notice and Access rules to cut AR printing and mailing.
According to Computershare's 2017 AGM Season report, less than 180 of its clients used Notice and Access and usage declined "for the first time since the solution was introduced in 2012". Computershare postulates that adoption will not increase until legislative changes permit Notice and Access use by Canada Business Corporations Act (CBCA) issuers.
The Future for Annual Reports
So if annual reports are getting bigger and print runs aren't getting appreciably smaller, does this mean ARs are here to stay, even though they are simply a receptacle for disclosures already made? The answer is perhaps – but not necessarily in their current glossy form.
There is nothing in law that compels a public company to produce an annual report with anything approximating the production values that remain the norm in the market today. Even for companies using Notice and Access, the requirement to mail a ‘full set’ of materials to securityholders who request it can be fulfilled by photocopying the MD&A, consolidated financial statements and notes and auditors'/management responsibility statements.
The reason reports are still typeset and produced in colour appears to be more about habit, peer benchmarking and concern for the company's ‘brand’ in the investor marketplace than best practice communication. As one IRO put it: "I don't personally believe the annual report is widely read even by our largest owners. Really, who has the time to read old disclosures that were available a month earlier. I'd be open to trying something less elaborate, but our company is not prepared to be a first mover toward a 10-K-style document when everyone in our sector still produces a glossy report."
This seems to suggest that once bellwether Canadian public companies move to 10-K-style reports, a domino effect will occur and there will be no going back. When that will happen is anyone's guess, but cost is likely to be one driving factor if companies conclude that money can be better spent funding higher value strategies such as investor roadshows, investor days or investor surveys. Another factor could be pressure from responsible investors who expect investee companies to be economical in the use of resources. Perhaps the appearance on one's desk of a 200-page AR on 80 lb glossy stock does not sit right today.
Are online reports the way to go? Many companies try this approach; some are satisfied, but a number of IROs contacted for this article said the traffic to their AR web pages was disappointingly low. This may be a signal that it's not the medium that matters, it's the availability (or lack thereof) of new information.
Moving Content to the Proxy
One emerging trend is the appearance of more elaborate management information circulars with Chair/CEO reports and financial graphs. Some companies appear to be using this document as a messaging platform, reasoning that it is the most widely read of all annual mailings. One example of a trendsetter in this area is Magna International.
Will the proxy circular replace the annual report ‘front section’ as the vehicle to reach investors? Time will tell.
What Should You Do in 2019?
The answer is to talk to your key shareholders and ask them if they value the annual report. If so, carry on. If not, you can choose to scale it back or experiment with new approaches to content and promotion. For example:
- encourage your CEO to write his/her own letter to shareholders, as this often yields insightful perspectives on strategy/business conditions that only the CEO can offer;
- give busy investors upfront the key information they need about the investment opportunity your company represents and make all front-section messaging clear and concise;
- leverage the content across communications platforms, including investor presentations and your IR home page, to get maximum exposure and value for your efforts;
- assuming you are a social media user, build interest by tweeting about the AR once it's mailed; and
- think about upgrading the messaging/design of the proxy circular.
Additionally, don't forget to investigate Notice and Access rules to potentially save the environment in 2019.
While ARs have certainly changed over the past century, they have been surprisingly resilient in the face of technological advancements. There is nothing to suggest that we will see their demise in 2019, but smart IROs should assess AR value to ensure funds are well spent.
Where To Get More Information