Monday, January 09, 2006

Simpler Annual Reports

The Globe and Mail, Janet McFarland, 9 January 2006

Manulife Financial Corp.'s most recent annual report hardly looks like a trendy document.

There are no pages filled with glossy photographs, no colourful graphics, and no clever design themes. The bland 128-page booklet is printed almost entirely in black and white on inexpensive, flimsy paper.

"Over the last couple of years, we've spoken to some of our shareholders and we've asked them what they want to see, and most of them have said, 'Just give us the numbers,' " says Terri Neville, Manulife's assistant vice-president of shareholder services. "So we decided to take a risk and go that way."

While a glossy annual report has long been the key marketing document for many companies, experts say a far simpler annual report is the trend of the future. A growing number of companies are abandoning the glitzy format as investors turn to the Internet for simple electronic versions that can be downloaded and printed quickly.

A new survey shows investors have little interest in receiving printed annual reports any more. And while few Canadian companies have so far adopted Manulife's bare-bones approach, the trend is in full swing in the United States.

A survey of U.S. companies found that 47 per cent, including one-third of Fortune 100 companies, have adopted a basic annual report format. Most of these companies now prepare what is known as a "10-K wrap" -- or their legal 10-K document wrapped in a cover, sometimes with a couple of pages of extra commentary at the start.

A survey of 144 Canadian companies, meanwhile, found just 16 per cent are preparing a basic annual report.

The Canadian survey was conducted by Toronto-based investor relations firm Genoa Management Ltd., the Canadian Investor Relations Institute and CCNMatthews.

John Sadler, managing director of Genoa Management, said he was amazed to see the U.S. data, especially the number of giants at the leading edge of the trend -- including Microsoft Corp., Sprint Nextel Corp. and Motorola Inc.

"My jaw dropped," said Mr. Sadler, who has spent his career working in the investor relations field. "The fact that that many companies are moving away from the traditional, big-budget annual reports was a startling statistic."

He believes Canadian companies will inevitably follow the U.S. trend.

"If you can get the document to shareholders by posting it on the website and having the information instantly available, then the utility of spending all that time and effort producing a fancy document starts to become questionable."

Given the choice, most investors say they don't even want a printed annual report. The Canadian survey found that more than half of Canadian companies asked investors last year if they wanted a copy of the annual report, and 61 per cent of the companies reported that fewer than 10 per cent of their investors chose to continue receiving the mailing.

CIRI president Bob Tait, the former director of investor relations at Canadian Tire Corp., says annual reports have traditionally been a key marketing vehicle, but said that feature is becoming less significant as more investors turn to companies' websites to learn about products and operations.

Instead, financial information is becoming the overwhelming focus, with companies now beefing up financial data and analysis.

"There's no question that there is a growing importance of the MD&A [management discussion and analysis] statements and notes as the prime pieces of annual reports, and there is likely a reduced emphasis on doing a full-blown, full-colour annual report," Mr. Tait said.

Sun Life Financial Inc. spokeswoman Susan Jantzi said her company's research confirms that investors who read annual reports are primarily interested in financial data. As a result, Sun Life began streamlining its annual report last year, eliminating large colour photos and simplifying the design.

"Our annual report is a focused document, and it's really designed to provide a snapshot of the financial performance of the company," Ms. Jantzi said.

At Manulife, the change was driven in part by time constraints. Companies must send financial statements to shareholders within 90 days of their year-ends. Other new rules require more detailed disclosure in MD&A sections, building pressure to produce more in less time. Last year, Manulife began combining its shareholder proxy circular with its annual report to save time.

The new survey found the average Canadian company spends $17.27 a unit to produce and mail annual reports to investors, more than 2.5 times the U.S. average of $6.78 a report. Manulife, by comparison, spent just $3.35 for each of its 850,000 annual reports last year, including distribution costs.

Ms. Neville says shareholders seem satisfied with the documents.

"We received not one single complaint," she said. "And lots of people called me to say, 'I really like what you did, it's very environmentally responsible, and obviously you are concerned about how you are spending the company's money.' "

The cost of reporting

Canadian companies spend more per copy than U.S. companies to prepare their annual reports, typically because they spread their costs over a smaller shareholder base.

Canada U.S. (all figures Cdn)
Average annual report budget $142,000 $169,500
Average number of copies printed 23,900 61,900
Average cost per copy 17.27 $2.93
Average number of pages 65.3 72.8
Provide report on website 71% 88%

144 Canadian companies surveyed: 278 U.S. companies, U.S. figures exclude mailing costs.