Worth reporting

By Robert Colapinto
Illustration: Jo Tyler

Corporate reports used to be a one-page communications tool for analysts and regulators. Today, multipage CRA entries reveal just how complex disclosure has become

“Fifty-four years ago, when the CICA started recognizing excellence in corporate reporting a typical annual report might have been a mere eight or nine pages long,” says Bill Buchanan, former senior vice-president of studies and standards, at the CICA. “Times have certainly changed.” As the overall judging coordinator for the coveted Corporate Reporting Awards, Buchanan emerged in October 2004 from a stupendous number of submissions ranging from 75 to 90-plus pages. “Oh for the days of that eight-pager,” he laughs, “where the company might have simply had a list of directors and a bare-bones balance sheet. But those days were truly a disservice to investors, even though a lot of information was provided to them in private. In theory, today’s investor seems to have access to almost anything, including the kitchen sink.” 

This year’s crop of awards’ entries —113 in all — reflect the increasing complexity of both today’s business world and an evolving regulatory environment working hard to respond to the growing demand that the intricate workings of publicly held corporations be more comprehendible and transparent.

The disclosure requirements of today would surely have been deemed shockingly revelatory, irresponsible and no one’s business in 1823, the year of one of the earliest known annual reports. Still, Baltimore Gas & Electric Co.’s humble document — all of one page and penned in longhand by the CEO’s secretary — was a first reticent step toward an understanding that companies serve themselves, investors and the public best by reporting as accurately and as in-depth as possible. “The CRAs work to this goal of accurate and in-depth reporting by awarding badges of excellence for those who produce reporting that is not only informative and comprehensive, but understandable and meaningful,” Buchanan says. “Problem is, of course, the parameters of voluntary and regulated reporting have expanded enormously and the [awards] have had to evolve to mirror these new pressures and opportunities.”

Over the past seven years, the awards were reformatted to reflect best practices in areas that were either nonexistent or of passing interest only a decade ago. In 2003, for the first time all four categories that emerged from this process were used to determine the overall winner. Entries from the 13 key industry sectors listed on the Toronto Stock Exchange are now judged not only for excellence in annual reporting but also in the topical categories of corporate governance disclosure, electronic disclosure and sustainable development reporting.

Sustainable development reporting One of the more interesting trends is the emergence in the early ‘90s of environmental reporting — now called sustainable development reporting. Following the general requirement for expanded reporting in the area of corporate accountability, companies have acceded to investor demands for transparency in the environmental, health and safety aspects of their operations. The Global Reporting Initiative of 2002 provided internationally recognized standards and principles from which companies could present a framework for the reporting of their sustainability programs. The following are characteristics common to best practices in sustainable development reporting: Clear, concise understanding and articulation of key business risks and issues in the context of sustainability. A corporate vision that includes sustainability and communication of how business strategy and business decision-making incorporates this vision. Communication of the corporate governance structure and management systems, including formal engagement with stakeholders. Comprehensive performance indicators in a number of key areas including environment, regulatory compliance, product stewardship, community impacts, health and safety and economic development.

“The traditional annual report is no longer the end-all instrument in corporate reporting that it was a few short years ago,” says Blunn & Co. Inc.’s Chuck Midgette, the Canadian Investor Relations Institute’s CRA judging coordinator. “For its financials to be relevant and credible, the usual information on assets, revenue and expenses are only a base point. What we really look at now,” he says, “and score with the highest points is how the management’s discussion and analysis [MD&A] works to flesh out those numbers.”

Indeed, the MD&A requirement has evolved in importance to the point where many financial information sections within this year’s annual reports begin rather than end with the MD&A. “You could argue that the MD&A is now the document that is supported by the financial statements, rather than the other way around,” says Buchanan. “This is quite revolutionary, given that the MD&A didn’t exist 10 years ago.”

In the past, by the time of publication the financials of an annual report were of passing interest to most analysts, according to Midgette. Analysts are immersed on a daily basis in the minutiae of a company’s performance and rely on other more timely sources such as the Internet for their investment decisions. “The annual report was more a straightforward communications tool aimed at investors and compliance regulators, even though some analysts may use it for historical information,” he explains. “And to this day, at its most basic it’s a simple PR or marketing vehicle, which really doesn’t fool even the most naive of investors.”

The best of best practices in MD&A reporting, though, is a forward-looking document that offers strategies, advice and insights into how the company plans to improve its position in the marketplace. “This sort of perspective is hugely valuable to both the investor and veteran analyst but potentially more so to the retail investor,” says Midgette. “And it’s why the [awards] grade so high in this area.”

Ideally, corporate reporting looks not only at the present but also at the past and future. Although companies are not ob-liged to take such a route, true excellence comes in the form of a company’s willingness to explain why and how its projections have either fallen short of or met and even exceeded expectations, says Buchan- an. “You want to see forward-looking information and the evolution of a company’s strategies,” he says, “otherwise, there is no foundation on which to determine the abilities of those managing the operation.”

With nine years under his belt as the awards’ overall coordinator, Buchanan has seen it all and is seldom shocked at the egregious miscues he encounters. Still, it remains a wonder when an annual report fails to offer a reasoned guide to its future aspirations. “You want to see the CEO or chairman come out with a bang right up front in the annual report,” he says. “You want to hear them explain exactly how they’re going to create more value for the investor and what their targets are. If they can’t do that, then they’ve missed the boat when it comes to the kind of information investors really want and need.”

For the modern-day investor, the Internet has become the tool of choice when it comes to garnering as much knowledge as possible about a company. In 1996, most listed companies started offering a smattering of information about their state of affairs on their rudimentary websites. By 2001, the once frilly and vacant high-tech appendix to the hard-copy annual report had come into its own, opening the door to the most expansive of disclosure capabilities.

From real-time Webcasts of quarterly earnings calls and archived analyst meetings to archived transcripts of investor presentations, to CEO keynote speeches and past annual reports, electronic disclosure has no equal in the drive for the greatest possible transparency.

“As electronic disclosure judges, we are looking for ease in navigation to all these goodies within the site,” says Tracy Lutz, president of Calgary’s Keystone Investor Relations Inc. “If you can’t easily click your way to the information, then disclosure is simply an illusion.” Topping Lutz’s list of best practices is the company’s use of the Web as a time-sensitive source of information. “It’s only here where the investor can, with any ease, get the very latest financials, news, speeches and presentations,” she says.

High marks for this year’s entries were awarded to companies that effectively ar-chived their past annual reports and presentations. “This element of the company website speaks to the ability and right of the investor to go back and see how well management has performed against its stated projections,” she says. “It’s as key a part of any good website as it is for a hard-copy annual report.”

Another excellent fit for electronic disclosure has been its ability to allow for more effective disclosure in the thorny issue of corporate governance practices. Much of what has driven the growth of the ever-expanding annual report has been the litany of corporate scandals and high-profile bankruptcies over the past several years. It is no surprise that corporate governance has developed into a critical disclosure feature within the awards process.

“Electronic reporting has been a godsend for companies bent on disclosing the reams of information they generate in any given period concerning their governance practices,” says Mike Harris, partner and corporate governance leader of PricewaterhouseCoopers and the CICA’s corporate governance judging coordinator. From inter-listed companies — that must comply with the Sarbanes-Oxley Act — to their all-Canadian counterparts that recognize the competitive advantage of keeping up with the inter-listed Joneses, this element of corporate reporting is easily a hot-button issue.

“The CRAs have taken all the best practices from the Canadian Securities Administrators, the Ontario Securities Commission, the Toronto Stock Exchange and US exchanges to develop governance guidelines that cover the gamut of board activities,” Harris says. “In the end, the whole idea is to offer a window, by good disclosure, from which to look at how the board operates. And from there, we make our judgments on how good their disclosure practices have been.” But Harris is not satisfied with companies simply checking the boxes of compliance. Innovation and creative thinking make for winning corporate governance disclosure.

Although the primary goal of Harris and his team of judges is to rate companies on how well they disclose their corporate governance practices and their structure — the level of separation between the chairman and CEO, expertise and clearly delineated roles of directors, structure of the board/management matrix, relationship with and independence of external and internal auditors — he can’t help but look for leading-edge reports that disclose information above and beyond any list of guidelines. “Of course, the best companies make use of the Internet,” he explains. “We look for their best practices. For example, in their proxy document, one company might ask readers to click on the website where it has actually posted the board’s orientation handbook and another may have taken the time to explain, in detail, the work plans of each of the committees on the board. These things aren’t required, but they help create the trust and credibility that’s so sorely needed these days.”

Corporate governance disclosure has become a very important component of today’s best annual reports, according to Buchanan. The fullest disclosure in all areas of corporate reporting coupled with enhanced corporate governance best practices create a credible impression that the company is committed to transparency and accountability. “A lot of companies are coming around to believe that a unique and believable corporate reporting strategy will go a long way in boosting investor confidence and, in the end, benefit their stock prices,” he says. “This perception is a good sign, because we should have no doubt that creating these annual reports and disclosures is often an onerous and sometimes humbling task. It’s a happy thought that such hard work is rewarded with something more than our acclamation and a pat on the back.”

Reporting miscues Although the vast majority of this year’s Corporate Reporting Awards entries were of a high standard, our judges were still able to find consistent miscues in a number of reports: Poor plain language reporting still plagues a number of companies, says Bill Buchanan, FCA and former senior vice-president, studies and standards, at the CICA. “Saying what you mean in the management’s discussion and analysis without falling into unnecessary technical jargon seems to be a real challenge.” Far too many companies give a sense in their reports that they operate in a vacuum, ignoring how and why industry trends and the competition might thwart or help their performance. The annual report is an ideal catalyst for investor feedback, but the opportunity is mostly squandered. “The whole process should be a continuous loop of information and feedback flowing through the system,” says Mike Harris, partner and corporate governance leader of PricewaterhouseCoopers and the CICA’s corporate governance judging coordinator. “But the tenor of even the more earnest annual reports seem to say, ‘Here’s our massive effort to disclose and inform — end of story.’” Electronic disclosure technology should easily solve the above concern. “Unfortunately,” says Tracy Lutz, president of Keystone Investor Relations Inc., “some electronic reporting sites still make it difficult for investors to put in their two cents and receive a plain language and to-the-point response.” Far too many electronic reporting sites offer just a laundry list of massive Adobe PDF files, says Lutz. Endless PDF downloading is required to find a single item, when the files could be segmented, categorized or turned into the more user-friendly HTML format. Some corporate governance reports make little of the ongoing education of company board members. The Institute of Corporate Directors, for example, sells out every one of its classes, particularly on how to work as a team with other board members and management, as directors attempt to upgrade their skills. “You’d think that we’re all numbers and hard facts in these awards,” says Buchanan, “but we also take great stock in the quality of a report’s graphic design.” Buchanan is irked by some of the unnecessary glitz and glamour that does little to enhance the report’s message. “The theme should start at the cover art, where it gives you an immediate visual impact of what the message is going to be inside. It would follow on in the chairman and CEO report and should be themed right through the operations, the MD&A graphics and on to the last page.”

Robert Colapinto is a Toronto-based writer