A COMMON misconception among those who compile and write company disclosures is that clear and simple language only matters if your company has a lot of retail investors.
But that’s not true. Professionals appreciate plain language just as much as lay people. In fact, they probably appreciate it more because they have to do a lot more reading than the average person.
This sprang to mind as I was reading the New York Times’ special report on executive compensation today, in which our readability research is quoted. The two main stories in that special report focus on how discombobulating (now there’s a long word) the “new and improved” pay reports are.
Not a whole lot new in that for you, our regular readers, but what is new is who is complaining.
“God help the average person”
Take former S.E.C. chief accountant Lynn E. Turner, who is now a managing director of research at Glass, Lewis & Company, a proxy research firm. He tells the Times: “It’s like reading through Tolstoy’s ‘War and Peace.’ What is missing is a clear, succinct story about how the compensation committee came to the amount they were going to pay.”
Then there’s this delicious description by Times writer John Schwartz in a column titled Transparency, Lost in the Fog: “The disclosure forms run dozens of pages, with so much swirling data and paper that they form a cloud, like the foil chaff that fighter jets drop to confound radar.”
That analogy is quite brilliant.
Schwartz quotes Brian T. Foley, an independent compensation consultant, someone who shouldn’t have any trouble whipping through a CD&A with his morning decaf, as saying: “Most of us in the trade don’t know whether to laugh or cry.
“My own test is, can I read it through, or do I lose focus? I’ve been doing this for 30 years — if I lose focus, or can’t figure something out, God help the average person.”
10-K wraps killing the friendly annual report
Actually, I find this all rather gratifying. Why? Because it is shining a bright spotlight on a problem has been getting steadily worse for several years.
Communicators have been shoved aside in the investor relations profession over the past five years. In their place we now have many more IR professionals acting either as glorified nannies to hedge funds and short-term focused analysts, or as expensive compliance officers.
Look at the state of annual reports if you need evidence. Last year’s National Investor Relations Institute annual report survey found that gray 10-K wraps — essentially SEC annual filings sandwiched between a few glossy pages — are now the dominant format for annual reports.
Fully 56% of survey respondents said they used a 10-K wrap, up from 47% in 2004. In 2002, just 16% said they produced these unwieldy documents.
Meanwhile, less than one-third (32%) reported producing a traditional professionally designed annual report, which was a sharp drop from 46% in 2004.
On the Web, which is where most corporate disclosure is accessed today, it gets much worse. If a 10-K wrap or proxy statement is hard to read in print, imagine what it’s like in a series of jpeg photographs or as a single PDF or river of SEC text.
Yet that’s most often what shareholders will get when they visit a U.S. company’s website. There’s no effort being made to communicate. None. Claims to the contrary are lies.
A failure to communicate
All of this is coming at the same time that retail investors are forsaking direct investment in U.S. stocks as never before and company management and boards are contending with powerful, well-financed activist investors.
Meanwhile, experts say the U.S. is losing its capital markets advantage. Foreign firms don’t see much reason to list in the U.S. because its declining valuation premium doesn’t offset the added costs and risks.
Besides, investors can buy stock in friendly overseas companies directly on newly merged overseas exchanges. Even retail investors can do so via the likes of E-Trade. Why would companies go to America when U.S. investors are more than happy to go to them? Exactly, they won’t.
You’d think that the geniuses on Mahogany Row would see the correlations. Perhaps they will, but let’s hope they bring back the communicators before it’s too late. — by Dominic Jones