In the Internet age, investors are bombarded with information about the stocks they own. They can watch fluctuations in share price in real time via the Internet, track their portfolios via investment portals, and receive updates via their Palm Pilots. They can get press releases and news stories about companies sent to their desktops, they can participate in chat rooms, and they can study the companies’ own websites. Given the level of information overload, one might be forgiven for wondering what value the traditional annual report is adding.
By the time the annual report arrives in the mail—as hundreds of thousands of them have done over the past couple of months—active investors have already seen the last year’s numbers—and the results for the first quarter of this year. “You have to ask yourself, other than the glossy pictures, what are you missing? The answer is, probably very little,” says John Markese, president of the American Association of Individual Investors.
Questions of relevance notwithstanding, companies last year spent a total of $8.5 billion on annual reports, according to a study conducted by Roper Starch Worldwide for paper company Potlatch Corporation. And 80 percent of Fortune 500 executives said the annual report was still the single most important document their company produces.
The amount spent is likely to be down this year, however. Times are tough, and companies don’t want to appear ostentatious. Michael Rosenbaum, president of The Financial Relations Board says more of his firm’s clients are producing “10k-wraps,” essentially brochures with the 10-k statement enclosed. Investor groups are seeing the same trend “We’re seeing more and more abbreviated annual reports, which is fine so long as they contain the essential information,” says Ken Janke, president of the National Association of Investors.
Companies are not only cutting back on gloss and glitz, they are also cutting back on the number of reports they print.
According to Sid Cato, who produces the Newsletter on Annual Reports, companies have printed an average of 1.9 copies per year, but the rate has dropped to 1.2 copies. Says Cato, “My guess is it’s a direct result of the influence of the Internet.” Southwest Airlines, which in previous years printed hundreds of thousands of copies, this year produced just 30,000. Non-shareholders who want to learn about a company can do so more quickly and more conveniently via the Internet.
Many companies are beginning to recognize that the Internet presents them with an opportunity to reach a wider audience at a lower cost. “I think we are seeing—or are soon going to see—a significant shift in spending toward the website and away from the print annual report,” says Rosenbaum.
AOL Time Warner produced an unusually austere report for a company its size: 60 pages on light stock, with no photos. On the back page, the company offers shareholders the opportunity to sign up to receive future reports via e-mail. “Sending the documents electronically helps AOL Time Warner reduce printing costs and postage expenses,” the company says.
Victoria’s Secret parent Intimate Brands, meanwhile, clearly cut the budget for its annual report, and acknowledges as much in the letter from chairman and chief executive Leslie Wexner, who says the company expects the economy to be more challenging over the next 12 months, and so it is tightening up on expenses and asked its designers to come up with a less expensive annual report—just two years after creating a report that looked more like a lingerie catalog, with sexy photos, samples of lipsticks and perfumes, and a swath of black silk stocking.
“No sense spending money on what it, in essence, last year’s news,” Wexner told shareholders, urging them to go online for additional financial information.
According to the National Investor Relations Institute, 76 percent of companies made their annual reports available online last year, compared to just 31 percent in 1996. The majority (78 percent) made their reports available in downloadable PDF format, and almost all (91 percent) said they included precisely the same information online as was contained in the print edition.
That may change, according to Keith Mabee, president of Cleveland public relations firm Dix & Eaton. Says Mabee, “The vast majority of annual reports are in PDF format, which can be very difficult to get through. The more bells and whistles you add, the more expensive it is, but it adds something in terms of readability.”
Only 9 percent said they planned to discontinue the print report, and none had done so to date, and in the Potlatch survey 90 percent of Fortune 500 companies—and 86 percent of recent IPOs—thought print annual reports would always be around.
That’s because shareholders still appear to prefer the print version. The SEC requires companies to secure investors’ consent before transmitting materials electronically, so last year Procter & Gamble included flyers with its report, encouraging investors to join the digital age. Around 67,500 investors—out of 1.1 million—indicated their willingness to do so.
“There’s no doubt that the annual report is being considered more carefully in conjunction with the investor relations website,” says Rosenbaum.
From a public relations perspective, of course, the medium is less important than the message. And while many observers say annual reports have been getting more candid, and more willing to discuss bad news—with more CEOs following the example of Warren Buffet at Berkshire Hathaway—there is still something of a credibility gap, as, annual reports continue to accentuate the positive and gloss over as much of the negative as they can.
William Rutz, a Rutgers University professor who specializes in rhetoric and has advised the federal Securities and Exchange Commission, says too many annual reports employ “vague, pompous or complex language” in an attempt to obscure the facts.
Texaco’s annual report, for example, makes no reference to CEO Peter Bijur or his departure in February of 2001. Lucent’s annual report makes no reference to Richard McGinn, who was deposed as CEO in October of last year—although his successor, Henry Schacht, does take pains to point out that he was not leading the company when the mistakes that led to “a tough year” were made.
Michael Rosenbaum says relatively few of this year’s annual reports have discussed the impact of the economic downturn, although he believes there is some justification for that. “Most people started work on these reports at the end of last year or in the first month of 2001. At that time, it wasn’t clear whether this was going to be a one-quarter downturn or a real trend. I would expect to see companies deal with the issue much more thoroughly next year.”