How to write an annual report

June 22nd, 2012, Published in Articles: Energize

Sir

I offer these tips because a slew of annual reports from across the industry have made their appearance, and your erudite readers might, when perusing these tomes of information, like to have at their fingertips some analytical tools with which to delve into the often dense material to separate fact from fiction. Not that there is fiction in Annual Reports, you understand – far be for me to suggest that – but it nevertheless behoves a shareholder (or modern stakeholder) to be alert when being regaled with many tales of well and woe. He or she should be aware of the awesome power behind the humble written word (and the occasional graph, drawing, photograph, distraction, summary table or explanation box, of course).

Annual Reports have had a chequered history, hence they deserve to be read with due care and diligence. The first rules (or “suggestions”) for companies reporting to their shareholders were made by the London stock exchange as far back as 1801. Across the pond, they woke up a bit late and it wasn’t until 1895, long after Scrooge and I had shuffled off this mortal coil, that the New York stock exchange imposed their recommendations. And it was not until the 1960s that GAAP and later the IFRS made their dreaded appearance, forcing companies to come up with new and novel ways to convey information “deemed relevant to stakeholders” to be included (or excluded, depending on the circumstances). Most large companies, of course, produce, if not exactly sleek, then certainly colourful and high gloss publications that meet these requirements.

Scrooge and I, being partners and abhorrent of ideas such as selling stock in our thriving little business to external shareholders, nevertheless were of service to some of our clients when the requirement of an annual report became mandatory. We have refined these over almost two centuries, and presumed to develop a few practical hints which are still often employed today, as one may judge from the full-pound, heavy tomes produced (almost) regularly by the titans of our industry.

The first rule is the “Rule of Abundance”. This should not be confused with the “Rule of Repetition”, nor the remuneration of the company’s officers, but the content of the annual report itself. An abundance of  figures (if not facts), a plethora of words, pictures, plenty of footnotes, financial notes, cross references, appendices, speeches and quotes by (and photographs of) the chairman and prominent board members. If one ends up with less than a hundred printed pages, it is not even worth the paper it is printed on. These days, the norm is about twice that, and the trend is to produce two or even three volumes. Together it should weigh more than the proverbial pound.

Remember the writing on the wall? Nobody wants to be found too light. In modern Ethernet versions of annual reports there is more to distract – excuse me, read focus – the attention of the reader on myriad interesting diversionary pathways or “links” to all manner of engrossing nooks and crannies, none of which have anything to do with the business at hand. The “Rule of Abundance” applies to many other aspects of annual reports as well, like deep mystification, unwieldy acronyms and obscure terms (complete with a glossary the size of Webster’s Dictionary). Authors are advised to devise as many pitfalls as they deem necessary.

There is a corollary to the “Rule of Abundance” – the “Rule of Scarcity.” Now, if it is good news, one uses the “Rule of Abundance,” right up front, in the middle and as a conclusion, like the “Rule of Repetition”. If, on the other hand, it is bad news, one employs the “Rule of Scarcity”. If the reader is not supposed to know whether the news is good or bad (of if the venerable officers of the company do not know either), it is probably wise to employ scarcity, although there is one school of thinking that advocates a quick “Rule of Confession” right after the frontispiece (or as part of the frontispiece or title page, it that can be managed in a slogan like “shift performance, grow sustainable” when performance has been dismal and growth less than mediocre).

Next there is the “Rule of Obfuscation”. This is a little alien to engineers, but those with other groundings, like politicians, consultants and even statisticians are well versed in it. A good example of this well-worn rule is the use of graphs with a suppressed zero scale over a judiciously chosen time period. Depending on whether the news is good or bad, one can almost make it look good either way. (Or bad, depending on the circumstances.) Another clever way is to use an Index instead of actual numbers. Fine print is a bit of a cop-out, having been annexed by the legal profession many years ago, but corporate-speak is advancing with great leaps and bounds.

“Value chain”, I believe, is presently close to the top of the list. As your readers will know, I am forced to drag along many chains of my own making, none of which have ever proven to be of any value. Or one could use highlights (as I’ve yet to come across an annual report with a page of Lowlights), or “Key Facts and Figures” as a way to deflect the gaze from the “Horrible Facts and Figures Too Terrible to Contemplate”.

And lastly, of course, there is the venerable “Rule of Rules”. The Regulations clearly demand  certain norms, like the use of historical costs. So one must stick to the rule when it applies. If one wants to show a respectable profit, one is often best served by using historical cost of depreciation. So it behoves a respectable company to point this out a priori, although it is prudent to show in a note, say, that the profit would melt away in the bright light of more realistic future replacement cost of capital equipment, especially if one is in a business that has large masses of machinery that last for decades and the cost of which escalates at a frightening rate. That objective is aided by the “Rule of Abundance”: there should be enough notes and cross-references to depress even the most optimistic analyst. The problem remains, of course, to explain before a regulatory board that one needs a price increase, but that is dealt with by the “Rule of Rules” too. There are rules for annual reports and rules for tariff determinations, and hopefully (for the company), nobody will notice the discrepancies. Authors should always bear this in mind when choosing the correct terminology.

So, armed with the knowledge of how the best annual reports are written, your erudite readers should now be able to easily sort the wheat from the chaff. And while they do that, Sir, I remain your humble and obedient servant

Jacob Marley