New regulations have transformed annual reports, but is all this extra information really helpful or informative for investors?
Ten years ago, when investors were passive and corporate governance a more abstract concept than it is today, oil giant BP’s annual report was just 90 pages long. Similarly, eight years ago British Aerospace’s (BAE) annual tome measured 72 pages. It was a novella rather than a blockbuster, but the dull contents meant these dry and dusty documents were destined to be thrown away or filed on an out-of-reach shelf, never to be read.
A host of UK government regulations has changed all that. Within four years, the annual report of BAE Systems, as the company became known, had grown by two thirds to a whopping 117 pages of detailed information for shareholders to absorb. Last year it hit 134 pages. BP, which has transformed itself into one of the UK’s most profitable companies, now educates its investors with a door-stopping 228-page annual report weighing almost three pounds.
Vital statistics?
Of course, there are now far more pages of financial data, remuneration details and the minutiae of directors’ shareholdings and long-term incentive plans. Indeed, the notes to the accounts can form well over half a standard annual report as UK PLC embraces the culture of transparency.
It is not just finances that are shared with readers, however. Annual reports now contain a wealth of information on issues as diverse as waste management, energy use and staffing levels. Changes introduced as part of the UK’s Companies Act 2006 now mean corporations are forced, in the name of transparency and openness, to include the kind of data most investors have never even thought about.
For example, BP’s most recent document contained details of its greenhouse gas emissions, its ‘contributions to communities’, employee satisfaction levels and, perhaps bizarrely, the DVDs, targeted emails, intranet sites and magazines it uses to communicate with its 97,000 workers.
There was even information on the programs BP runs ‘to raise our senior managers’ awareness of diversity and inclusion’. The company highlights its annual review on its corporate website with the phrase: ‘BP is reducing complexity, improving consistency and changing behaviors.’
BP is far from an isolated example. In its report, BAE shared figures on its energy use with its investors, as well as detailing the amount of waste it recycles, the gender, age and ethnicity breakdown of its workers, and the amount of ‘volatile organic compound emissions’ – whatever they may be – BAE Systems produces.
Not to be outdone, UK banking group Barclays even found enough space in its 302-page annual report, with its fetching photograph of a freesia on the cover, to inform shareholders how many of its staff were classed as having a disability. Indeed, its operating review looking at the group’s financial performance, risk factors and accounting details is now only marginally smaller than its governance section.
The simple life
With all this new information provision, it’s no wonder annual reports are getting so long. But while transparency is undoubtedly a good thing – few people would wish for a return to the days when shareholders were seen, not heard and kept in the dark – can there be such a thing as too much information?
The answer is yes, according to Roger Lawson of the UK Shareholders Association, which represents retail investors. ‘It is very clear that a lot of small shareholders don’t read annual reports, particularly those of FTSE 100 companies,’ he says. ‘They usually get thrown in the bin because so much of what is in them is just a distraction. You get a lot of obfuscation and very little meaningful information. There needs to be much more simplification.’
Lawson believes most shareholders, both institutional and retail, want a ‘meaningful chairman’s message, one that contains the financial position of the business, the risks the company faces and the outlook for its prospects. Certainly, if you look at the annual reports of banks and insurance companies, for instance, you are likely to be overwhelmed by too much information that is very difficult to interpret for retail shareholders.’
In the past, companies have been reluctant to provide too much guidance for fear their reports would be seen as marketing paraphernalia urging consumers to buy their shares, thus leaving them potentially liable to lawsuits further down the line. The Companies Act seeks to guard against such a situation, prompting the inclusion of better information.
Lawson says he regards information on CSR issues as a ‘total waste of time. If you read the annual reports of the oil companies you would think they were cuddly beings doing their best to save the planet, when we all know it’s not like that at all. Nobody believes it. There is a place for corporate and social information, but I think it is probably best in a separate document where people can read it if they are specifically interested in it. The problem you have is that companies use this kind of information not necessarily to inform shareholders but for their own PR purposes.’
Tim Steer, fund manager at New Star Asset Management, is equally scathing of annual reports, describing them as ‘total propaganda documents. Most of the stuff in them is just another example of government interference in business. Most of the CSR information is of interest only to around half a percent of shareholders in the UK who want to feel they are investing ethically.
‘The annual report is unlike any other document. You have to start at the back; page one should be page 121. The important stuff is in the notes – that’s what I’m mostly interested in, because it is the place where companies tend to try to hide the bad news.’
Wood for the trees
Perhaps one of the most difficult aspects of putting together an annual report is that one document must satisfy a broad range of needs from a diverse set of shareholders. As a result, reports can contain far too much detailed information for some investors, yet provide little in the way of a strategic overview for others.
‘I really don’t think many people sit down on the sofa at home with a mug of cocoa and read all the way through an annual report,’ asserts David Paterson, head of corporate governance at the National Association of Pension Funds, whose members control assets in excess of £800 bn ($1.59 tn). ‘These reports are primarily there for shareholders. If you are a banker, analyst or trade unionist, you can get information you need from a company in a different way.’
For pension funds, whose fiduciary duty is to ensure the payment of their members’ pensions, the primary concern is to look at potential returns rather than social or environmental issues. Fund managers, many of whom specialize in corporate governance, environmental concerns or ethical investing, often take a different view, however.
For them, information on CSR is crucial, and numerous attempts have been made over the years to draw a correlation between good corporate, environmental and social practice, and stock market returns. The FTSE4Good Index, for instance, was set up for exactly that reason.
Many others, however, believe the link is tenuous at best, including Ebba Schmidt, consultancy services executive at UK shareholder lobby group PIRC. ‘Including such information is certainly a step forward, but there remains the question of whether it actually has any influence on financial performance,’ she explains. ‘It is telling a story, but not necessarily the whole story.’
For David Myddleton, professor emeritus at the Cranfield School of Management in Bedfordshire, UK, investors would be far better served if annual reports went back to the old days of providing simple and succinct financial information in 20 pages or less.
‘All you really need are the details of the directors and a simple financial statement of income and expenditure,’ he says. ‘I dispute the idea that people use annual reports to make investment decisions. The new standards are based on pages and pages of regulations that produce pages and pages of guff. I have been looking at annual reports for 50 years and if I don’t understand them, I doubt anybody will.’
As the season for annual reports rolls around again, it is perhaps time for companies – and those responsible for devising the regulations – to go back to the drawing board.
