The winners' circle

By Robert Colapinto
Illustration: Jo Tyler

The companies that win the annual report awards invest a lot of time and effort in submissions that only get them a kind of certificate. So what’s in it for them?

“You know, we may be the oddball here, but a key strategy for developing best practices in corporate reporting has been our concentration on reputation risk management,” says Betty-Ann Heggie, senior vice-president, corporate relations at Potash Corp. of Saskatchewan Inc. “Reputation is the most valuable asset any business can have and only by disclosing entirely transparent corporate information can we hope to win people’s trust and, in the course of events, enhance our value with investors.”

Heggie is ecstatic and amazed. Her Saskatoon-based mining company, though enduring one of the worst years in its history, has just been informed that it has prevailed over 112 competitors to win the Overall Award of Excellence in Corporate Reporting in the 2004 CICA Corporate Reporting Awards. “Our excitement at taking this honour has increased exponentially because we submitted a reporting year to the judges where it was rather painful to open our robe for exposure,” she laughs. “There were a lot of warts, so we see it as a real testament to our willingness to be as transparent as possible.”

PotashCorp was also the winner (across all industry sectors) in electronic disclosure and in sustainable development reporting, and became the first quadruple-threat since the awards were revamped in 2003 to recognize a number of things: a) excellence across 13 industry sectors in each of the four judging categories (annual reporting, corporate governance disclosure, electronic disclosure and sustainable development reporting); b) a leader in each of the sectors in the corporate reporting categories; and c) a single overall winner in corporate reporting from those  sector winners.

“You really have to take your hat off to companies that had a bad year, but were still insistent on not sugarcoating their reporting,” says Bill Buchanan, FCA and the CRA’s overall judging coordinator. Of particular note was Molson Inc., which fell on its sword for its lackluster performance yet garnered high praise from judges before just missing the cut. “[It was] uncompromising and candid by saying up front that, in so many words: ‘We are to blame, here are all our problems and mistakes, and we’re going to fix this damn thing.’”

The purpose of the awards’ judging criteria is not to assess the bottom-line performance and health of each entry. It is the determination of how well each company illuminates its present circumstance with clarity and integrity that wins the day. And naturally, those that had a spotty year will be more hard-pressed than others with their disclosures. PotashCorp bolstered its reputation for fearless transparency in the face of adversity by presenting solid financials and a hugely detailed and referenced peek into the future of both the company and its industry sector.

Disclosure of the company’s relative positioning provided extraordinary insight for readers attempting to understand its poor performance in 2003 and the forward-looking strategies announced in its CEO’s letter and the management’s discussion and analysis. “We never wavered from enunciating only attainable goals,” says Heggie. “Our annual report attempted to be far less of a marketing tool than one usually expects of such documents. Otherwise, our projections would have been far rosier.”

For Peter Provencher of Quebec City-based Industrial Alliance Securities Inc., such candor is refreshing and a reflection of the intense scrutiny now placed on corporate disclosure. “In my role as an investment adviser to individuals and small business, I look at annual reports, and corporate reporting in general, to get just that sense of transparency we expect these days,” he says. “I don’t open the [annual report] and expect the company to proceed to slit its throat, but I want to be able to advise the less sophisticated investor — who has the [report] in hand — about how candid the company really is.” Provencher tends to focus on whether  the tenor of the document is truly a reflection of the company’s status in the marketplace and whether its forward-looking disclosures have merit. “I’m not going to expect an investor to know what rules the com- pany uses to determine what does and does not count as revenue, for example. I’ll be the one to dig those complexities out.”

For his more savvy institutional investors, Provencher relies on his daily dose of financials and projections from a number of more timely and objective sources, including the Value Line Investment Survey. Although convinced there is great value to be gleaned from an annual report, he often warns his clients that any reading should be taken with a grain of salt. “Let’s face it, the [annual report] is more a marketing and communications tool,” Provencher says. For institutional clients, he works to offer an opinion about whether the company’s disclosures have met all the legislated and regulatory criteria. His red flag, as he calls it, is usually raised when he finds something missing in these areas. “That’s when I start digging into the whys of the omission.”

Indeed, a number of entries in the 2004 awards were guilty of glossing over poor results or inflating their successes without giving their favourable results meaningful context within their respective industries. “It is a fine line they have to draw,” says Buchanan. “They’re truly having to expose their vitals and it’s certainly much easier if you’re already confident about your reputation. Those thorny issues of transparency and the fullest disclosure become far less onerous.”

Telus Corp. would argue that despite an impressive fiscal 2003, it was still a great challenge to meet the standards imposed by statutes and regulators, let alone those imposed by the company’s high standards. Telus is this year’s winner of both the Award of Excellence in Annual Reporting (across all industry sectors) and the Award of Excellence in Corporate Reporting (communications and media). Its annual report took an innovative turn by issuing a three-book document — with each book catering to a different segment of Telus’ diverse stakeholders and each geared to the level of interest of that group.

“Our philosophy is that we have a multiple audience,” says Bob McFarlane, executive vice-president and CFO of the telecommunications giant. “It includes not just our equity investors, debt investors, the bankers and investment analysts, it’s also aimed at the interests of our employees and clients — existing and prospective.” The multibook format impressed the judges with its “know your audience” format and a consistent and strong theme that mirrored Telus’ television and other media advertising and branding strategy. “The report is entirely consistent with our future-friendly theme and the nature-based images and clean and simple look of our ad campaigns,” says McFarlane.

The second book gets right down to business with a comprehensive set of financial statements, MD&A, audit reports and a report on corporate reporting and governance. The first book, the Business Review, is a mere 28 pages long, with bulleted highlights of the company’s two main business segments and a letter to investors from company president and CEO Darren Entwistle. The report starts with a simple question — why invest in Telus? — requiring complex answers. “I don’t think I’ve ever seen that brazen a question followed by the answers in the front of any other report,” says McFarlane. “Usually, that ‘why’ is still unanswered 120 pages later.”

Telus is also up front with the strategic management of its annual report. “At the end of the day,” McFarlane says, “this front package — the Business Review — is of a size and format where you can use it as a marketing document.” In many ways, it becomes a reference book or road map through which the reader can chart the company’s progress. “We have a simple approach,” says McFarlane. “We’re going to talk about the past; we’re going to tell you what we said we were going to do; we’re going to update you on how we really did and if we missed a target, we’re going to tell you we missed it. And at the end, we’re going to set up very measurable objectives for the following year.”

Feedback from investors and analysts is, of course, an ongoing process and understandably picks up momentum with every new issue of the company’s annual and quarterly reports. And with the advent of electronic disclosure, investors have found a powerful medium within which to communicate their concerns. “We certainly make good use of that function within our website,” says PotashCorp’s Heggie. The company’s award-winning electronic reporting site contains an easy to use “investor briefcase center,” which is devoted to investor research interaction.

Telus has also invested heavily in supporting its corporate reporting with a user-friendly website. Communication is key to transparency and the trust of those it calls its fellow investors. In its third book, which deals with corporate social responsibility, the company provides a concise guide to its relationship with the community. This helps mitigate risk to the company’s reputation by showing how its every action is put to the litmus test of its goal to become the ideal corporate citizen. In the end, the investor will have all he or she needs to make an educated decision about the present and projected value of the company.

Although McFarlane agrees that an annual report is mostly a confirmation of its hundreds of one-on-one meetings and guidance calls throughout the year with investors and analysts, the annual report adds value as it seeks to solidify an understanding of the company’s inner workings. “Even the most sophisticated analyst will always find nuggets of information in our reports,” he says.

“To be honest, analysts do not like to see any new substantive information revealed in annual reports,” says Karen Taylor, analyst and managing director of BMO Nesbitt Burns’ pipelines and utilities research arm. “The annual report really shouldn’t be the venue for such revelations,” she says. There are many other forums through which she expects to be informed.

Of course, one bottom-line form of feedback is often measured in terms of a bump in higher price multiples when a stellar annual report is issued. “Stock prices are a function of future expectations,” says Provencher. “So, providing accurate guidance about the future from a company is an essential element in attracting a superior valuation today.” Yet on the whole, the professionals are less enamoured with the power of the annual report to create a lasting effect on share prices. “The annual report is a necessary but not sufficient instrument to use in awarding a higher valuation,” Taylor says.

Nexen Inc., which tied with Petro-Canada as a winner of the Award of Excellence in Corporate Governance Disclosure (across all industry sectors), has identified a number of bottom-line reasons to ensure its governance best practices remain on track. “Our business strategy is largely based on growth through the drill bit,” says Rick Beingessner, vice-president, general counsel — corporate, at the Calgary-based oil and gas corporation’s headquarters.

“So we need investors who are at times patient and appreciate transparency.” Nexen was judged to have performed above and beyond the rest in its execution of best practices at the board structure level and in its assurance that the interests of its many stakeholders were in line with those of management and an informed boardroom. Its core culture is necessarily rooted in maintaining stakeholder consultation and an unblemished reputation, given the sensitivity of its operations.

“We have a sour gas field right on the Calgary city limits,” Beingessner offers as an example, “and so it’s very important that we communicate with people often and thoroughly.” 

For Beingessner, the entire process of developing a best-practices governance regime allows Nexen to look inward and get a better sense of itself, how it operates and how best to deal with future opportunities and challenges. “Openness is not just a wonderful touchy-feely thing for us,” he says. “It’s the best way we know of mitigating risk.”

Risk management, in all its forms, but particularly as it shapes reputation, has long been an overriding priority for Nexen, as it has been for PotashCorp and Telus. “Whether it’s risk in terms of financial performance, ethics, social and environmental reporting, regulatory compliance or even as it affects marketing and innovation, it all comes down to managing the risk to reputation,” says Heggie. “In the spirit of full disclosure within an increasingly competitive world, it has now become a key competence, a cornerstone for the best in corporate reporting.”

Robert Colapinto is a Toronto-based writer