LAST week saw the deadline for big American companies to file their annual 10-K reports with the SEC. There was quite a bit of hoopla this year because it was the first time companies were filing their internal control reports in compliance with the much-hyped Section 404 of the Sarbanes-Oxley act.
Most companies made the deadline, of course, though many filed for an extension. According to the SEC, about 8% of companies that filed internal controls reports found material weaknesses in their internal controls. But the market’s reaction was muted at best. Indeed, it wasn’t uncommon for deficient firms’ stock to go up after their disclosures.
Due to all the attention on this year’s annual reports, I’ve been taking a closer look at how 24 of America’s flagship corporations — the Dow Jones Industrials companies with December 31 year-ends — handle their annual reporting to shareholders on the Web.
It’s worthwhile looking at this for a couple of reasons. First, the annual reporting season is the most important period for communications between public companies and their legions of long-term retail shareholders. Most of these investors don’t follow companies closely and typically only take a look at their holdings once per year. So this period is critical for reinforcing why companies think these shareholders should continue to hold their stock.
The second reason online annual reporting is relevant is because more shareholders than ever will be receiving their annual meeting materials electronically this year. Watching how companies handle their online annual reporting offers insight into what it is like to be an e-shareholder in a big American company today.
So far the results show that, with a handful of exceptions, being an e-shareholder sucks if you own stock in the average Dow Jones Industrials constituent. Only General Electric has come anywhere close to providing investors with an online package that might convince them they’ve made the right decision to give up printed reports.
What did GE do right that none of the other companies could manage? Quite simply it gave long-term shareholders a reason to use the Web. There are two main reasons GE succeeded while most others failed. They are:
- Timing and coordination; and,
- Usable formats.
Timing and coordination signal expertise and respect
Some large companies have announced they’ll be filing their annual reports late this year. This is not a good thing, of course, and these companies will have to get their acts together to gain investors’ confidence that they know what they’re doing.
But you didn’t have to be a late filer to get your timing wrong this year. In fact, even if companies filed their reports before the 75-day deadline this year, investors could still be wondering how well these companies are run. That’s because the 75-day deadline would have been 60 days if not for a late reprieve by the SEC last November to cut companies some slack by postponing the shorter deadline for another year.
In other words, companies filing their 10-Ks after 60 days have just demonstrated that they weren’t ready for the shorter deadline and needed the reprieve. Of the 24 Dow Jones Industrials companies with a December 31st year-end, just under half filed later than 60 days. The earliest filer was United Technologies. One company, controversy-plagued American International Group, missed filing its 10-K by the 75-day deadline.
However, it’s not just filing a 10-K with the SEC early that matters, but also how a company coordinates its 10-K filing with its annual report to shareholders — the retail investor version of the report. The challenge for companies is to post their annual reports to shareholders online at the same time as they file their 10-Ks.
Failing to publish the two simultaneously in effect leads to uneven information access among different types of investors. If a company files its 10-K before it posts it annual report online, institutional investors, who typically are familiar with 10-Ks, access the company’s information ahead of most retail investors. This is because retail shareholders tend not to use SEC filings because they are extremely cumbersome, especially big 10-K filings which typically run to 140 printed pages.
Only GE and United Technologies published both their online annual reports and their 10-Ks simultaneously within 60 days.
Put simply, companies that respect their retail shareholders’ right to equal information access will aim to publish their 10-Ks and their annual reports to shareholders simultaneously. This helps to ensure that all shareholders have access to information in a format that fits their needs. To be clear on this point, the issue is one of equal respect, not equal disclosure. A 10-K is equally accessible disclosure, it’s just not equally usable disclosure.
Of course, another reason to publish the two reports simultaneously is to get maximum mileage from the annual report, which typically is a better document for communicating the company’s story. Filing a 10-K before the annual report is available diminishes the value of the annual report. Consequently, fewer institutional investors and active individuals will bother reading it if they’ve already seen the 10-K.
Of the 24 companies reporting this February/March, only GE and United Technologies published both their online annual reports and their 10-Ks simultaneously within 60 days. Put another way, these two companies’ timing of their annual reports demonstrates to observers that:
- They have good systems and processes for financial reporting and won’t have difficulty meeting next year’s 60-day deadline; and,
- They respect the principle of equal access to their annual information for all shareholders.
But timing and coordination are not the only issues that demonstrate a company’s attitude to shareholders or its expertise to plan and execute effective annual reporting to shareholders. The formats in which companies choose to post their information are just as important.
Format choices demonstrate companies’ attitude to shareholders
As I write this, only four of the 24 companies have published their online annual reports in an effective format for retail shareholders. Of these, GE‘s online annual report is the best, followed by IBM, United Technologies and Johnson & Johnson.
The rest are useless as online communications tools and send a message that these companies don’t care about their retail shareholders.
The norm thus far has been PDF blobs of annual reports and 10-Ks. As I wrote in December, PDF blobs are an insult to loyal shareholders who have signed up for electronic delivery. In return for saving their companies money in printing and mailing costs, they’re given a slap in the face in the form of a large download that is unfit for human use unless it is printed out.
Printing out an annual report or a 10-K is impractical for retail investors. The reports published by the Dow Jones companies run anywhere from 60 to 171 pages. That’s a significant burden to shift on to someone accessing the report on a home computer.
The irony, of course, is that while many companies pitch e-delivery as having environmental benefits, they’re providing their reports in formats that are meant to be printed out on a computer printer. PDF documents are not meant to be viewed and read online. The format is designed for documents to be printed out.
Other problems among this small group of big companies are reports that provide all the financial information in grainy images that cannot be resized or repurposed into spreadsheet or word processing software. Image-based annual reports are indicative of companies doing what’s convenient for them, but not for their shareholders.
Last, but not least, a couple of companies provided online annual reports where the narrative section is in HTML but the financials have to be downloaded in PDF. These reports have a strong marketing tone, make companies less credible and waste everyone’s time by focusing on the very parts of annual reports which traffic log studies show investors ignore.
Any company that has not published its letter to shareholders, financial highlights, MD&A and financial statements and notes in HTML has missed the boat when it comes to meeting the needs of their shareholders.
But so what? Why bother with retail investors when only a handful of big investors have the ability to move the company’s stock? It’s a good question, one I suspect many IR departments already have their own answer to.
If you want to know what they think, take a look at how they treat their online annual reports.