Annual reports are not getting any shorter but they sure are getting clearer. What’s more companies say they are realising the business benefits.

“The annual report is an institution like Christmas,” says Stuart Anderson, a director at design consultancy 85four.

“It comes round once a year and you start getting ready earlier and earlier each time.” So has it been the same old routine for you this year?

The process usually starts with a review of last year’s annual report in comparison with others in the same sector or index.

“Peer group pressure is a major driver of change in annual reports,” says Sallie Cooke Pilot, director of corporate reporting at marketing and communications agency Black Sun.

This year, many companies have focused on some of the simple stuff, such as improving the way they talk about the business, how its activities are split up in terms of different products, services and markets.

“Companies hold all this information, they just need to pull it together. It is often articulated in other places, such as investor presentations that haven’t been transferred to the annual report. These are the easy wins,” says Pilot.

Overall, the IR agenda is giving a greater steer in terms of what information is included in the annual report and how it is presented.

For example, a lot of companies expose divisional management to investors and analysts as part of the IR programme. And this year there have been more direct reports from divisional management in the reports.
 
Shelf life
For years, people have complained that the annual report is out-of-date by the time it is published. But, with a more forward-looking orientation, reports have the potential to stay relevant for longer.

“There is nothing to stop reports from being useful – you just have to think carefully about the information that you put into them,” says Richard Carpenter, development director at Radley Yeldar.

“Giving more detail about strategy and how threats and opportunities are handled, inevitably gives a longer term perspective.”
 
Dominik Cofalka, co-founder of Austrian consultancy Mensalia, says that one-third of the chief executive’s statement should be about what happened in the past year and two-thirds should be focused on future milestones.

“It is a trailer for what is coming in the next 12 months,” he says.
 
Internal benefits
Many companies have accepted this year that, if you they have to go through the arduous process of producing a report, they might as well get some benefit out of it.

Black Sun carried out a survey of UK companies to find out whether companies felt that increased transparency in their reporting had produced business benefits.

The results, published in a report titled From the Inside Out, are pretty positive. One of the key findings was greater alignment between senior management and the board.

“Many of the improvements in this year’s reports reflect the fact that, once companies start to increase transparency and put internal processes in place, they start to see better joined-up thinking and greater understanding across the organisation,” says Pilot. It’s also the regulations and what needs to be reported.

Companies that tend to get most out of the reporting process often have a strong figure in charge.

With so much information to gather from different parts of the business, the alternative, says Carpenter, may be “death by committee – a mundane report that doesn’t do anything original”.

Structure
The first 20 pages of an annual report are the most important. It’s where readers go to find out what the business does and where, what the challenges are, how the company is performing, who is in charge and its strategy for the future.

It’s the bit that puts all the numbers into context. And, crucially, it convinces existing and potential investors that the business is a good investment proposition.

The starting point has to be a simple explanation of what the company does, and that goes for household names, too.

“Most people know roughly what BP does, but how many really know how the operations are split between, say, petrol stations and exploration?” says Carpenter.

An at-a-glance spread within the opening pages is all that’s needed to make sure that everyone knows the basics.

Annual reports must cater for the interests of many different stakeholders – customers, suppliers, existing and prospective employees, and many more – but IR teams must ensure that their audiences are high on the list.

Reuters is particularly successful at making its investment case in a clear and succinct way early on.

As with everything in annual reports, less is more. In this case, the company picked just two words – “growth” and “simplification” – to explain how it plans to deliver shareholder value.

“Surprisingly few companies spell out what is unique about them as an investment opportunity upfront,” says Carpenter.

Those that don’t are missing a trick. Another fundamental that companies have tended to underestimate is the importance of navigation.

It might sound obvious but, given the amount of time and energy that companies invest in producing these documents, the contents is one of the most useful pages and it has to be prominent.

Reports aren’t getting any shorter – if readers can’t find information with ease then they really aren’t much use to anyone. This point has really hit home over the past year and design consultancies say they have seen a dramatic improvement in signposting.

Individuality
Despite all the rules, regulations and guidance, there is no one-size-fits-all formula when it comes to structuring annual reports. But there are trends in terms of how companies are prioritising information.

Software company SAP starts its report with a small brochure of customers explaining how they use the company’s software and how it benefits their businesses.

“It is the best way to show the external world what we do,” says Friederike Edelmann, who is responsible for the annual report.

The SAP annual report is also one of the few that has a four-page report explicitly from the IR team. It explains, for example, the issues that most interested investors in one-on-one discussions throughout the year.

Risks and corporate responsibility are two sections that are no longer to be found floundering at the back of reports.

French hotel and leisure group Accor starts discussions about its engagement in social and environmental issues on page 16, after its management statements and governance information.

It dedicates 26 pages to talking about its record as an employer, particularly focusing on developing markets, its efforts to promote responsible development in the tourism sector and its steps to reduce the environmental impact of its hotels.

It does all this before it gives a detailed breakdown of its operations and core markets. There is no doubt that this sends a powerful message.

Integration
Every company wants to be seen to be responsible but, as Karen Almeida, IR director and annual report maestro at Reuters, points out: “The audience you are writing for are professional sceptics when it comes to what companies tell them.”

They are not going to believe that “people are your greatest asset” simply because you say so in big bold writing on page four of your annual report.

Instead of separating corporate social responsibility from themes and hard-edged discussions about strategy, operations, performance and risks, some companies are trying to produce a more integrated narrative.

“It is no good saying that something is key without giving any evidence,” says Carpenter.

“If you want CSR to be seen as a group-level issue then it has to be linked to strategy. You have to say this is our strategy, these are our threats and opportunities, and this is why we configure strategy this way.”

Some companies are starting to integrate CSR information across the report but many still think about the report in terms of sections, says Carpenter. “That can mean you lose a sense of the cohesive whole.”

Data and graphics
Brevity is the soul of wit. And as one design consultant I spoke to quipped: “It’s not the Benny Hill Show we’re dealing with here, it’s numbers.” Worse still, it can be page after page of legalese in a six-point font.

Keeping the word count down when you’re trying to review a complex global business such as Allianz is never going to be easy.

The group offers insurance, banking and asset management products and services to 60 million customers in more than 70 countries.

Graphics, pull quotes, bullet points and decent typography that highlight key data and provide a hierarchy of information are definitely the reader’s friend.

If you want to give an operational snapshot without punishing the rainforest, a map of the world giving product and market breakdowns is the classic way to do it. Allianz and Accor both use this technique to good effect.

And there’s no reason why graphics should be outlawed from the notes to accounts. They can be helpful ways of showing trends from one year to the next. For example, what are the key influences on pension liabilities?

KPIs
An area that companies have been really grappling with over the past year is how to present key performance indicators.

As discussed earlier in relation to corporate responsibility, integration into the overall narrative seems to be the name of the game.

What you don’t want to do is stick them all on one page with no links to strategy or business objectives, says Pilot. “You have to explain how they fit in with what you trying to achieve as a business.”

Reuters deliberately chose not to put them all together on one page. “It looks like you are just ticking the box that says ‘We’ve covered KPIs’ but you haven’t explained why they are significant,” says Almeida.

Putting KPIs in context is particularly important if a company is not doing as well as it expected against its goals.

Speaking at a recent event organised by Black Sun, Peter Montagnon, director of investment affairs at the Association of British Insurers, said he rather liked the “disarming honesty of a FTSE 100 company that said the trouble with committing to KPIs is that you couldn’t change the basis when things weren’t going very well”.

The other thing to remember is the ‘K’ in KPI. Companies report between two and 15 KPIs: those at the upper end of the spectrum are sending out the message that they either don’t know which are really important or they haven’t taken the time to think about it. Either way, investors will read between the lines.

The future
Another thorny issue is forward-looking information. Here, companies say they are wary of giving away competitive information and point to the fact that many of their rivals in Europe and further afield do not give nearly as much detail on sensitive issues.

Directors are also understandably concerned about making predictions that could return to haunt them.

Carpenter recommends that companies use external data sources to help them put their business into perspective and to talk about threats and opportunities in the marketplace without putting their necks on the block.

Reuters monitors external data sources to see which have been good predictors of market trends in the past and uses these statistics in its annual report to help support its outlook.

Two examples are the securities industry head count numbers and projections about the performance of stock indices.

Directors' voice
A phrase that is bandied about a lot is that a good annual report is a proxy for good management.

But is there any truth to it? Can a company have a strong management team with a clear strategy and commitment to shareholder value and yet decide to treat the annual report purely as a bland disclosure document?

Well, yes, plenty do. In Germany, there is a certain view about what an annual review should look like and reports have become more uniform, says Edelmann.

One reason why companies might believe that the look, feel and tone of their annual report are not really relevant is that they believe institutional investors are interested only in the back of the book.

But this is a misconception, says Kevin Bruce, a director at design consultancy 85four.

“Many like to read the statements in the front section to see whether the management take care over every word,” he says.

“They are interested in the tone and the emphasis. They are looking for clues within the forward-looking information. Big shareholder bodies are also very interested in the corporate governance information and management incentives.”

Showcasing management
Companies that want to show that they take the exercise seriously give the executive board and board committee members a much higher profile.

It could be as simple as the way their CVs are presented. “There is a greater emphasis on the working team as well as the board, and more focus on their achievements. For example, showing what they have been responsible for implementing in the past year,” says Pilot.

Many companies have also started to use journalistic tricks, for example, adding management interviews similar to those you might read in a magazine, says Cofalka.

“These can involve tough questions of the kind that management might get asked on roadshows. We do the interviews live and let them talk about strategy and forward-looking issues, not just products. It gives them a clearer voice and it feels more authentic.”

Companies might also give the head of a division or board member some space to write about their area. Reuters asked its newest non-executive Nandan Nilekani to write a report on the challenges of globalisation.

“A lot of companies expose divisional management to investors and analysts as part of the IR programme. It makes sense to have more direct reports from these key managers in the reports,” says Pilot.

Risks
 Risk management has been pushed to the front of many reports this year.

Often it was confined to a few paragraphs at the back of the financial statement offering legal guidance and explaining internal controls.

Not only are companies more happy to talk about risks, they are also taking less of a scattergun approach. “Last year, some companies reported maybe 30 risks, this year we’re seeing that number honed down to principal risks,” says Pilot.

Even more importantly, companies are taking each risk in turn and explaining what action they are taking to manage it.

“This shows that management is aware that there are downsides to the business but that they are doing something about them and are willing to talk about them,” says Carpenter.

In some reports this is also becoming a consistent theme throughout, which reflects the trend for a more integrated and forward-looking approach to reporting.

Reuters came up with the idea of q risk radar. This identifies six external and internal risks, explains the nature of the potential threat to the business and offers bullet points that highlight what action the company is taking to manage these risks.

All this is laid out in a table on one page immediately before the chairman’s statement.

The risks include the cyclical nature of the financial markets, structural and regulatory change in the financial services industry, meeting customer service demands and managing the company’s growth and simplication programmes.

Headline risks can and should be cross-referenced to other information in the report but there is no point in overloading the reader with detail.

“The average reader just wants the big picture, rather than every detail of risk assessed, but it is important to talk about mitigation in the same place. In the 20F there is no information about mitigation,” says Almeida.
 
Directors’ view
Bringing risk information to the front is also important because it creates the impression that it is a topic of discussion at board level, rather than simply a compliance issue.

Montagnon said that investors’ objective is to satisfy themselves that boards have thought about the question “What could kill our company?” and are addressing the most important threats.

“The unspoken assumption in this is that it would help boards and management to become more effective in managing risks and understanding them,” he said.

From the Inside Out seems to show that companies are seeing internal benefits as a result of greater transparency about risks.

Two-thirds of survey respondents thought that the disclosure of principal risks had had a positive impact on risk management.

Sixty-two per cent of respondents said that the process of writing the narrative had led to greater alignment between board members about what the principal risks are.

The report found that non-executives, in particular, had gained a much clearer understanding of the business risks as a result.

Online
Although a lot of companies are rethinking the structure and content of their paper annual reports, few are really exploring the full potential of online reporting.

For most companies, the main driver of online reporting is the potential to cut costs, rather than environmental concerns or the desire to improve the online report,” says Stuart Anderson, a director at 85four. 

Print costs have come down in real terms, but postage costs are increasing. So, for companies with a large shareholder base, there can be significant savings.

But, for those with small numbers of shareholders, say, 100 to 300, the news is not so good. As long as companies still have to produce some form of printed document, as well as the online version, then there is no cost saving, the costs will actually go up.

“It is very rare for large companies not to have an online version of their report but there could be a lot of improvement in the presentation,” says Anderson.

PDF and HTML are the main formats and the most user-friendly allow users to scroll through easily and enlarge the text.

“Technology and life sciences firms tend to be the most clued up on the internet, but the banks, which have massive risk sections and usually the biggest reports, have a lot to gain too,” he says.

Innovative thinking
Swedish technology consultancy Cybercom has one of the most cutting-edge online reports. This year it decided not to produce a printed version so it had to give serious thought to its online report.

One of the top priorities was to create a format that people could use online, rather than reaching for the print button.

The company decided to arrange the text in columns, from left to right, so that readers would have the experience of reading a printed document.

It also used Flash animation so that real people step forward and make statements, rather than everything being in text form.

When it came to the financials, the company wanted to give people a much more interactive experience of the numbers. So users can choose which financials they want to compare and plot their own graphs.

There is also a bundling option that allows each user to click on the bits of the report that interest them most and export the numbers or text.

“Cybercom really thought about what information would sit best together online, compared with in a printed report,” says Anderson. “It is a technology company so it also wanted to showcase what it could do. It was appropriate for the business.”

Top tips
Anderson’s advice is to pick relevant things out of the annual report, rather than putting the whole thing online.

“See how it fits together rather than shoehorning it into a different medium,” he says. Navigation is incredibly important online or in print. A big improvement would be to allow people to search, rather than having to trawl through the document.

“There is huge scope for interactivity and updating of information throughout the year with online reports,” says Anderson.

“You can take the main statements and show trading updates as a side column and provide links to information that explains what happens in the year that follows.”

The big question, says Anderson, is whether the IR website and the online annual report are going to converge and how?

Now there’s one to ponder during the next 12 months.