Yesterday's gone. Deal with it.
In an increasingly volatile financial world that detests surprises, shareholders want company annual reports to tell them what's coming next, rather than try to sugarcoat what they already know.
Companies have unpleasantly surprised investors too many times, most recently with the subprime lending fiasco. That's why, when unwrapping a brand-new annual report, it is a good idea to put last year's report next to it to see if their stories match up.
Investors may put up with delayed annual reports due to demands of increased government reporting, because that benefits them in the long run. But they're fed up with all the typical "blah blah blah," because they want to know what to expect, good or bad.
"The annual report has moved away from being a historical document to becoming a visionary document that speaks to tomorrow rather than yesterday," said Scott Greenberg, president of Curran & Connors Inc., Hauppauge, N.Y., one of the nation's largest producers of annual reports. "The focus has become products, markets, the people making things happen, growth, globalization and going forward."
Letters to shareholders must be forward-looking. Here is a sampling of "I don't have my head in the sand" letters from company officials in the latest annual reports:
• Warren Buffett of Berkshire Hathaway: "It's a certainty that insurance-industry profit margins, including ours, will fall significantly in 2008."
• Jeff Immelt of General Electric: "It will be challenging, as we expect U.S. consumer spending to slow and credit to tighten and be more expensive. However, GE is well-suited for this environment and any other. This is because we invest and deliver."
• Robert Rubin of Citgroup: "There is ample reason for concern, and the risk that conditions will be challenging and complicated seems to be increasing."
Companies are adding corporate social responsibility sections to their annual reports that detail their community reinvestment and commitment to the environment, Greenberg said. The annual reports are often constructed of environmentally sound materials, as well.
There's some backlash against overly fancy reports especially if financial results inside aren't equally impressive. In many cases, a downsized annual report is simply a wrapper around the basic 10-K annual financial filing required by the Securities and Exchange Commission.
"One relatively new development over the last decade is that many public companies put out condensed financial reports," said John Tracy, professor emeritus in accounting at University of Colorado at Boulder. "These condensed reports are relatively short and omit the footnotes to the financials."
Of course, an online annual report is the most ecologically advanced. Many see this as an eventuality, but not all agree.
"While some companies are migrating their annual report to the Web, I don't think we'll see that happen totally," said Jeffrey Morgan, president and chief executive of the National Investor Relations Institute in Vienna, Va. "What the Web primarily brings is the ability to update the story on an ongoing basis, so the company can note where viewers are clicking and provide more information in that area."
Proxy statements are definitely becoming more common online.
Last year the Securities and Exchange Commission adopted its "Notice and Access Rule," requiring companies to provide shareholders the option of receiving proxy materials either electronically or in traditional hard-copy form. Companies view this as potential cost savings that will save on paper. While the current year is one of transition in which not all firms are offering the option of an online proxy, all must make them available to investors in 2009.
Proxy statements present executive pay more comprehensively these days, including a table of the value of salary, bonus, stock and stock-option awards, incentive payments, changes in pension value and deferred compensation and other perks. But this transparency has spawned complexity, and the SEC is actively questioning the methodology used by a number of companies.
Proxies also increasingly include resolutions from dissident shareholders to shake up lagging companies and initiatives to change their boards. Because such proposals sometimes do win in these difficult times, carefully look at what's being proposed and vote.
Returning to the annual report:
After you examine the small-print footnotes where important information is often tucked away (that's where Enron hid its money-bleeding "entities"), check the auditor's report to see whether its approval of the company's statements is qualified. If it is, find out why.
Management discussion and analysis is supposed to tell it straight about past, present and future. Examine the financial statements of sales, profit, research and development, inventory and debt over time. Get a clear understanding of brands and subsidiaries, as well.
The balance sheet is a good place to find value. Look at the book value (assets minus liabilities and intangible assets) per share versus the stock price per share to see if it might be a bargain. Meanwhile, the cash flow statement is also important because growing cash flow is a positive trend in the ability to continue to do business. Sales and marketing information explain where the company makes its money.
The long-term summary of financial figures, list of directors and officers, and stock-price history also tell you where a firm is likely headed.Because it is the future that shareholders care about the most. Yesterday's gone.
Andrew Leckey answers questions only through the column. Address inquiries to Andrew Leckey, P.O. Box 874702, Tempe, AZ, 85287-4702, or by e-mail at [email protected]