COMPLEXITY is unavoidable in today’s ever more complicated and sophisticated business environment. Much of the complexity in corporate reporting, however, is created by the sheer volume of disclosure. The solution? Thoughtful reduction to achieve simplicity.
That may sound easy enough. But the corporate reporting system isn’t just about financial and operating numbers. It’s also about people who have different views about the purpose and value of corporate reporting, especially annual reports.
Alive and well in the US?
In 2009, for example, 81 of the Fortune 100 companies published an annual report, or at least something slightly more interesting than a Form 10-K, even if that something was nothing more than a cover. That statistic prompted a US marketing company executive to pronounce the annual report alive and well. But is it? Recent surveys and reports from Canada and the UK suggest exactly the opposite when it comes to the value and future of the annual report and corporate reporting.
Canadian investors ambivalent
A survey of Canadian investor relations officers (IROs) and professional investors by Toronto-based Equicom Group, a subsidiary of TMX Group (which also owns the Toronto Stock Exchange) raised serious questions about the value of annual reports.
When asked about the value of various investor relations tools, only 7% of IROs considered the annual report the most valued communication tool, compared with 8% of the investment pros. An even higher percentage of both groups ranked the annual report as the least valued tool: 16% of the pros and 14% of the IROs.
Investor presentations and press releases are the communication tools most valued by both groups. Why? Because they provide timely information better suited to investor needs. In Canada, then, the annual report isn’t alive and well: it’s on life support.
UK investors losing interest
In the UK, a report from PwC, Tomorrow’s Company and the Chartered Institute of Management Accountants warns of risks to the corporate reporting system, which includes annual reports. The group found that the corporate reporting system is a jigsaw in pieces, with no single participant controlling the process of fitting it together.
Those participants rarely share the same view of the purpose of corporate reporting, in part because of disparate mindsets and agendas. Moreover, they usually resort to bolting on more disclosures rather than refreshing or rebuilding the reporting model based on what’s material.
As one study participant commented, “Our impression is that investors have lost interest in the annual report as it is too lengthy and full of ‘compliance’ rather than information that the entity or the investors consider ‘need to know’.”
Cutting clutter to simplify communication
Depending on who you listen to, then, the annual report is either alive and well, nearly valueless or a dressed-up knuckle-dragger, unable to cope with the demands of the Information Age.
Let’s look at one area that can prevent investors from being buried in an avalanche of information. And that is cutting clutter, especially in governance and risk management sections, which are both big contributors to boilerplate and other “explanatory information”.
1. Filter out the noise
One reason investors don’t read annual reports is that they are filled with legal, accounting and technical jargon. Consequently, it takes investors too long to find and extract relevant information. It’s an accessibility problem that’s common to print and digital reports. Except for the professional investor, the reports are often too burdensome to use.
So consider a plain language review of the notes to the financial statements, and management’s discussion and analysis, to cut jargon and length. Ask your corporate governance committee if it’s willing to remove static governance information from the report. And if you can’t cut it or reduce it, find ways to highlight what’s new or changed from the previous year.
2. Forget the nuts
We’re all familiar with the “may contain nuts” warning on some food product labels. Similar all-encompassing warnings in risk disclosure are of no value to investors. Concentrate, instead, on summarizing principal risks that are specific to your company and the strategies for managing those risks. Consider cross-referencing to your website for more in-depth discussion of risk management. And avoid discussing immaterial risks. All this does is to undermine the overall quality of the report by adding useless material.
3. Reduce the creep
The annual report is overlain with a web of detailed rules and standards that can obscure key messages and important information. Combine those reporting requirements with the opinions of accountants, lawyers and other stakeholders, and the result is predictable enough: reporting creep. Simplicity nearly always suffers under the pressure of deadlines, with material more likely to be added than eliminated.
You can cut this creeping inclusion by starting early, debating the merits of contentious lengthy sections and finding ways to comprise. You won’t win all the battles. But there’s still a vast amount of complexity that can be eliminated or reduced.
It takes real determination to shift the reporting focus from compliance to end users by looking for simple, elegant ways to communicate. If, however, you want to evolve your annual report and corporate reporting, I suggest you think like Leonardo da Vinci, who said, “Simplicity is the ultimate sophistication.” Your audience will thank you with a Mona Lisa-like smile.