NETHERLANDS-based Philips Electronics has an unhealthy disrespect for its shareholders. Despite participating in an academic study showing that the majority of its investors prefer HTML annual reports, the company has posted its most recent report in a 219-page PDF blob.
The company’s actions raise questions about its intentions and the transparency of its reporting. Doubt also hangs over claims made by a senior finance official at the company who has twice failed to substantiate contradictory statements he made to IR Web Report.
The story starts a few weeks back while I was working on our joint online annual report survey with GeBer Geschäftsberichte. While validating the results, it jumped out at me that Philips was one of the 24 S&P Global 100 companies that posted their latest online annual reports in PDF blobs, the single worst choice they could make.
Server log study ignored
What is peculiar about Philips doing this is that last year the company participated in a groundbreaking academic study by professors Frank Hodge of the University of Washington department of accounting, and Maarten Pronk of the Tilburg University department of accounting and accountancy.
The study looked at how Philips’ investors use online annual and quarterly reports and found that they preferred using the HTML version of Philips’ prior annual report over the PDF version. In fact, 76.1% of users identifying themselves as non-professionals used the HTML version, with 61.4% using HTML exclusively and 14.7% using HTML in combination with PDF. Meanwhile, 59.2% of professionals used HTML pages.
However, this year the company has ignored the study and a company official has contradicted the research, which is being used for an upcoming article in the Journal of Accounting, Auditing and Finance.
Now there are two important facts to note here. First, this study focused on Philips’ investors. Second, the study used Internet server logs for Philips’ online annual reports and quarterlies to assess what information different types of investors use and when they use it.
This is significant because we are not talking about an opinion poll, focus group or survey here. We are talking about what investors actually used, not what they said they would or might use.
The server logs record electronically what the investors using Philips’ annual report actually did. In this sense, traffic logs are definitive. You can’t argue with traffic logs as easily as you can with a survey of 10, 20 or even 1,000 investors telling you what they think they use or will use. Traffic logs are fact; they record what really happens.
Get it? Good, because it makes what happened next all the more intriguing.
Company official contradicts own research
On August 25, 2005, I used the email form on Philips’ IR website to ask them to explain their rationale for posting their latest annual report in a single PDF file. The precise wording of my question was:
“To Whom It May Concern:
I am writing a report for global distribution on online annual report
practices of the S&P Global 100 companies.
Can you please explain to me the rationale for Philips to provide its
online annual report in a single PDF file.
This is the kind of question that leaves the door wide open to put forward any explanation you wish. However, the one thing you could NOT say — if you were Philips — is that investors don’t use the HTML annual report and prefer PDF. Because, well, that’s just not true because the server logs on Philips’ site show that both professionals and non-professionals use HTML more often than PDF.
Well, let’s see what Philips actually said.
On August 26, 2005, the day after sending my question, I got a reply from Remco Steenbergen, Manager Group Consolidation and Financial Reporting, Vice-President Corporate Control. And these are his exact words:
“In answer to your question, we have investigated the requirements of our external users of our annual report like the analyst and the media:
- They clearly indicated that they prefer and only use PDF files and hardcopy annual report. Key requirements for PDF are good content page and search function.
- HTML version of an annual report (in general) is not considered helpful and therefore not used.”
Well, how do you like that? A direct contradiction of the Philips’ annual report traffic log research.
No response to requests for clarification
Now, obviously I am curious to know what exactly Philips did to “investigate” this question. What type of research was this that caused them to disregard the actual, irrefutable preferences of their external users as evidenced by what they actually did when viewing the prior year’s report? When was the research conducted? Who conducted it? Why was it conducted so soon after the prior research, etc.?
So that’s what I’ve been trying to find out. What research did Philips do — if indeed it did any — that caused it to ignore the online annual report needs and preferences of its shareholders and investors in the Pronk and Hodge study?
I’ve sent two emails asking for more information about this, but Mr. Steenbergen, so fast to respond the first time, is strangely unresponsive.
Consequently, I can only speculate as to what actually transpired here. First, let me say emphatically that Mr. Steenbergen’s contentions are utter rubbish and he has so far been unable to produce a single bit of credible evidence to back them up.
We are tapped into every significant research development/project relating to online IR and we can tell you there is not a single piece of credible research anywhere in the world that can support the claim that anyone prefers and only uses PDF files or that HTML versions are “not considered helpful and are therefore not used.”
Ignorance is no excuse
So, the question arises: Did Philips act out of ignorance or arrogance? It’s important to know this because it can have vastly different consequences for how one interprets the company’s behavior.
Let’s assume that the decision to publish a PDF-only report this year was made in ignorance. Despite the academic study having been done with the participation of the Philips IR department, that whoever made the decision to blob the report did not know about the study.
In other words, let’s just say this is a case of the right-hand not knowing what the left-hand is doing. In a company the size of Philips, that’s quite conceivable.
But even if this is so, it is still not excusable because companies today should know better. Internet-based corporate reporting is so core to the practice of investor relations today that no semi-competent company would leave it to chance and whim.
Companies that don’t take online investor communications seriously are not taking their responsibilities as a public company seriously.
Simple decision, serious repercussions
Now, let’s say that Philips did know. That they decided to publish a 219-page PDF blob knowing full well that most of their online AR users would prefer them not to. That puts a whole different spin on things, doesn’t it? It takes things past ignorance to arrogance and even, dare we say it, deliberate obfuscation.
You see, if you look at the traffic log research in a different way, it tells you what to do if you want to discourage people from reading your annual report. Put the document in a big PDF and likely far fewer people will bother reading it. This is useful to know if there’s something you don’t want people to see.
I’m not for a minute suggesting that anything untoward is afoot at Philips. I am merely trying to show how something as simple as the format in which you choose to publish your annual report can have repercussions way beyond what you might expect. It can cast doubt on your company’s intentions and leave a strong impression of disrespect for the role of investors and a lack of transparency.
Shareholders deserve better
Of course, Philips is not alone in disrespecting its shareholders’ legitimate interest in receiving online corporate reports in easy-to-use formats. It was only one of 24 companies in the S&P Global 100 to publish only PDF blobs of their most recent online annual reports.
More widely, 90% of the same group of companies and 83% of the 516 large-cap companies in our wider research are failing to meet an acceptable standard for their online annual reports.
Whether it is out of ignorance or arrogance is beside the point. The issue is simply that investors, the providers of capital and the ultimate owners your company, deserve better.
Response from Philips received on October 24, 2005:
We’d like to comment on your remarks on our online reports in your edition of 26 September 2005 as we think our relationship should not be driven by misunderstanding.
Within Philips, we value our online reporting tremendously. In this area, we make choices based on a variety of factors, which we evaluate continuously, making changes where appropriate. The Hodge and Pronk study is one of these, but it is not decisive for us.
As I stated in my previous e-mail, in addition to the input we received from our main users, our current approach is based on the following:
- We value speed in our external publication and therefore we opted for the PDF solution.
- We have benchmarked our approach with that of other companies, with the result that fewer and fewer companies are working with html.
- Except from your remarks, we have not had another complaint from a user that there is no html version.
- Our PDF report is a small download, and our search function in PDF seems to be well appreciated.
- A summary of our financial reporting is available in html on Philips News Center.
As much as we value your opinion, as it provides input to help us evaluate whether we are taking the right approach, we do not currently envisage a complete change of tack. But we are planning to split the PDF into several sections for our 2005 Annual Report to be published in 2006. Of course, we will continue to evaluate the additional value we can generate for the users of our financial information and, where appropriate, adjust our approach to online financial reporting accordingly.
With kind regards,
Manager Group Consolidation and Financial Reporting
Vice-President Corporate Control