Oh no! I forgot to evaluate the annual report!

Communication World, Dec, 1998 by Alice Brink

It's probably the most expensive, least effective communication vehicle your company produces. Here's how to make sure your annual report is worth the money.

It's March 20 and the annual report is in the mail. Hand-inspected copies have been delivered to the CEO and senior executives, and the contented silence tells you no glaring errors have been discovered. Time to breathe a sigh of relief. It's over.

But wait...isn't there one more step? Aren't you going to measure the results?

Surprisingly (or perhaps not), the answer is often "no." Even major corporations that spend six months and upwards of a half million dollars to produce a glossy, eight-color annual report tend to rely on "anecdotal feedback" to gauge the success of their efforts. Formal evaluation processes are few and far between.

How does such a big-budget item escape scrutiny to determine its effectiveness? The answer lies in the complex nature of the annual report itself. On one level, it is not designed to communicate; it is designed to comply For publicly held U.S. companies, the annual report's real purpose is to meet the disclosure requirements of the Securities and Exchange Commission. At that level, evaluation is easy: Fail to satisfy the requirements and the SEC will provide definite feedback.

For many companies, just keeping up with the SEC is a challenge. "Our focus is on meeting SEC requirements, which have changed somewhat in recent years, as well as communicating our business focus in a timely, cost-effective way," said the public relations director of a major energy company.

But most companies go well beyond the minimum securities requirements, choosing to invest in the annual report as a communication vehicle to reach current and potential investors - and often, other audiences as well. To reap the full benefit of that investment, the report needs to effectively communicate key messages that market the company to those audiences. And to be effective, you have to understand the audience's needs, know why you are communicating with them, and be able to measure whether you have accomplished your goal. Take those three steps, and your annual report will be well worth its cost.

Who reads this stuff, anyway?

Here's a jolt of reality: Most individual shareholders will spend only a few minutes reading a document that took four to six months to produce. So to whom should you target your communication?

AT&T, which prints more than 4 million annual reports to reach one of the largest shareholder bases in the United States, groups its audiences into four segments: institutional investors, individual investors, key influencers (including investment analysts) and other interested parties, such as legislators, regulators, libraries and universities. Other companies include customers, employees and retirees (who may or may not be shareholders) as significant audiences.

"If I had to choose to which audience the report is written, I would say to our investors," said Eileen M. Connolly, director of financial communication for AT&T. "We strive to balance the needs of individual investors with the more detailed needs of institutional investors."

For most companies, the audience that will read the report most closely, and have the greatest influence on the company's stock, is the professional investment community. This includes sell-side analysts, who research specific industries and market their reports to brokers and investment clients; buy-side analysts. who study stocks for large institutional holders such as mutual funds; pension fund managers; money management firms; portfolio managers; and full-time individual investors. While this group may constitute only a small percentage of the total annual report mailing, it is the audience most reports are written for, and with good reason.

Shelley Taylor, whose international management consulting and business publishing firm publishes a biennial study on corporate disclosure practices and individual investor needs, states that the annual report is considered the single most important corporate source of information to European investors and the fourth most important source to American investors. (American investors give greater weight to meetings with management, company faxes and meetings with investor relations.)

"Investors view this as a way to get information directly from the company, not filtered through another source," Taylor said. "For the company, voluntary disclosure going beyond the required information is the company's greatest opportunity for differentiation."

What does this audience want? Taylor cites five key elements institutional investors look for in an annual report:

* Accountability: Does the company do what it says it will do? Is the company able to meet the goals that it sets for itself? (Most analysts compare three consecutive annuals, looking for year-to-year consistency.)

* Industry and market information: What factors are driving performance for the industry as a whole? How does the company fit into its general industry?