A Brief Guide to Annual Reporting and How to Get the Most from it

Hey guess what! In 2008 most Australian listed companies’ annual reporting teams are going to get lucky with more work and more decision making. Not only will they have to contend with the old traditional printed report but they’ll also have to plan for some online reporting. Read on.

The biggest thing to hit the annual reporting world happened in mid 2007 when new Legislation in Australia made it no longer necessary for ASX-listed companies to supply hard copy annual reports to shareholders, unless they specifically request one. This closely follows similar changes that have already happened in the US, UK and New Zealand. So will this mean the end of printed annual reports and dealing with those expensive designers and printers? No.

For the forseeable future the printed report will still be around, but it won’t be quite the same and there certainly won’t be as many of them. Why is this?

1. Decision-making time for shareholders
In 2008 many Australian listed companies are going to rely on shareholders receiving a rather ineffective and poorly presented piece of paper from their registries (who have been very slow on the uptake), briefly informing them of the Legislation change and asking them to tick the box if they still want a printed report. Sadly, most shareholders ‘in the heat of the moment’ of viewing this poor piece of communication will probably tick the box regardless of really knowing why. Also, in the absence of being able to view anything better than the traditional PDF report on the company website to whet their appetite, there is no real incentive for them to change old habits.

Why not try a DL-size mailer, perhaps with an environmental theme, simply and carefully explaining, as a company committed to its shareholders and the environment, why you think the new Legislation makes sense for all concerned and the good reasons for moving online?

It will get better in 2009, you wait and see. Oh by the way, are you getting good service from your registry?

2. The environment
Here we are wondering whether we’ll still be able to afford to run our cars in coming months, frightened to wipe our backsides on virgin tissue paper, wondering why drought-ravaged vegetables are so expensive in the shops while shop keepers in Queensland strive to save their livelihoods from swollen flood waters. And still companies are not leveraging the environmental good sense of moving online. They’re still not informing shareholders of the power, water and trees consumed and the pollution generated by producing their printed annual report each year.

Perhaps the following isn’t sufficient to prompt some action?

Greenhouse gas emissions
> Manufacturing 26 sheets of paper emits the same amount of greenhouse gas as driving your car one kilometre.
Clean Up Australia

Trees
> One tree is used to produce 100 copies of an average (83 pages) annual report.
> The average print run of a Top 200 Australian company is 186,000 copies = 1,853 trees per company.
Chartered Secretaries Australia

Water consumption
> one litre of water is used to produce seven sheets of A4 paper, therefore 1.1 million litres of water are consumed for an average Top 200 Australian company’s annual report.

This is why there is an obligation for responsible companies to communicate the facts to their shareholders!

Heywood Innovation offers a service where we can calculate the resource consumption of your present printed annual report and how a move to online reporting can drastically reduce it. Valuable statistics to have available to help ensure shareholders resist the temptation of ticking the ‘yes’ box. Email us for info on this service

3. Annual Review
In the blue corner, weighing in at around 24 pages or so, and pioneered by the likes of AMP, ANZ and Commonwealth Bank is the all new contender for the annual report crown – the shareholder friendly Annual Review, or Short Form Report as it is also known. Received to rapturous applause from the ringside, this is probably what shareholders have always wanted. ASIC however just wouldn’t allow it in those dark days before Canberra parted the waves and led shareholders to the Promised Land of online reporting. It is an easy-to-read, discreet and cost-effective way for shareholders to quickly access and digest essential information on the company’s performance and prospects... but remember that it is still not compliant, and the ASIC man will pay you a visit if you pretend otherwise! If shareholders want a printed report you have to give them a concise or full version. The Annual Review at best is a way to wean shareholders away from the traditional and more expensive reports.

What content do you put into one you might ask? We have yet to find any guidelines from the likes of ASIC. Perhaps they’re too busy knocking on doors. Reviews so far have included Company Overview, Chairman’s Report, CEO’s Report, Company focus, Financials Highlights, 5 Year Summary, Remuneration Summary, Board of Directors, Community & Environment, Governance overview, Online information map, Financial Calendar and contact details.

4. Where did the colour go?
Why are the latest annual reports only black & white or one colour? Or have I gone colour blind? Simple. Companies want to save money. It’s justified by the fact that few shareholders will request a printed report. Why spend big bucks on so few? Companies like Foster’s for example complement their 2007 b&w concise report with an Annual Review as described above http://fosters.com.au/investors/docs/fgl_review07.pdf This has a more lively, retail-focused presentation compared to say the ANZ offering at www.anz.com/aus/shares/finance/annual.asp

But don’t forget that you are still required to have an online version.
“Knock knock who’s there?”
“ASIC”.
“ASIC who?”
“’as sick and tired of knocking on your door”.

So how are companies responding in these post-Legislation times? When my fellow director Lyn and I spoke at a CSA-sponsored online reporting workshop on the Gold Coast in late 2006 advising companies on the forthcoming Legislation changes, we were met with varying responses from participants. These ranged from “Does that mean we don’t have to produce an annual report any more?” to “We’re sticking with printed reports regardless”. Since then much discussion and analysis has issued forth from CSA, AICD and ASA together with a few mutterings from the ASX who still have some technology problems to fix at their end, and many traditional printed annual report designers have gone out and purchased ‘HTML for Dummies’.

PDF vs HTML
In the battle between PDF and HTML for online reporting supremacy, PDF has been forced back to the Adobe labs for a rethink. Despite being an unmatched way of transferring print-based documents electronically from PC to PC, the shortcomings of looking at static images of many printed annual report pages are no longer acceptable to shareholders. The obvious benefits of HTML annual reports we pioneered in Australia, which finally found favour in 2002 with the likes of AMP, Commonwealth Bank and Perpetual, underpin their acceptance as the best practice option. It will be interesting to monitor how many companies persist with a PDF of their printed report this year. They will probably be the same ones who don’t even offer shareholders a cup of tea and a biscuit at their AGM.

Remember this – things have now changed... the online annual report is now the hero not the printed one. Focus your efforts on planning the online report first.

So what is an HTML annual report?
Put simply, an HTML report is like a mini-website with the recognised benefits of easy and fast access to information and intuitive navigation for viewing on screen, the way it was meant to be.

How much do you want to pay?
There are basically two price point options you need to consider. I’ll use the offer from my company Heywood Innovation as the example – 1. $4,950* and 2. $14,950*. So what’s the difference between them?

1. $4,950 – The client supplies us a PDF of the printed report. With our software we convert the editorial section to HTML and convert the financials pages to images. This is a capable and professional templated presentation which should satisfy even the most discerning shareholder.

When XBRL arrives however, and it’s just around the corner, you may wish to upgrade to having the financials also in HTML. In this version only the editorial section can be searched.
View our Aspermont example
View our more advanced Westpac example

What is XBRL and how does it affect me you ask?
Take a look at this www.xbrl.org/WhatIsXBRL/ for an explanation, and www.iasplus.com/pressrel/0708xbrl.pdf for an update on how it’s being adopted around the world. For XBRL to work, the content must be HTML or PDF to be searchable for XBRL tags which identify particular types of information which you can select, analyse and store.

2. 14,950 – The client supplies us the editorial section as MSWord or Indesign files and financials in MSWord or MSExcel. This version has all content in HTML, making the report XBRL compliant. The report is custom designed to your requirements and can include Flash animation for additional effect. View our Coates example

* based on 60 pages. Further information can be accessed at our other site www.report-axs.com

The changing of the ways
Are you confident that you have a great process in place that will optimise your chances of producing a great annual report? Or is it one you’ve lived with for many years that gets dusted off each year when your desk calendar reminds you once again to hold off on the holidays, stock up on Panadol and rehearse the excuses to your partner as to why you’re late home the sixth day in a row? Now you’re going to have to change. You need to be confident that you’re going to select the most appropriate online solution for your needs. You’ll need to ask shareholders how many of them still want a printed report. You’ll need to co-ordinate production of the printed and online versions. You’ll need to decide whether you’re going to offer an Annual Review instead. You may consider online interim reporting now that it just got easier and less expensive. And more...

So what if only a handful of shareholders request a hard copy report?
You probably have four options:
1. Be slightly apologetic and hand over a laser printed set of your Word and Excel files
2. Wrap a nicely designed colour cover around them, with fewer apologies
3. Get the report digitally printed
4. Provide a full colour annual report and try and ignore the print invoice when it comes in.

What does Flash do for online reports?
Flash is a program that enables animation to be included in your online HTML report to create further interest and focus attention. It needs treating with some restraint as it is very easy for designers to get carried away with extreme effects that are at odds with the report’s communication objectives!

Check these out. Here is the Coates 2007 online with Flash incorporated into the home page

Here is the AMP 2002 online AR with a brief Flash introduction

So what’s digital printing got to offer?
It means that for quantities up to 500, digital printing is more cost-effective than litho printing to get a full colour printed annual report. Digital printing quality has improved over the last few years to the point where most readers will find it is almost indistinguishable from traditional litho printing. And you can personalise every copy. Think about that. Those important institutional shareholders and analysts can have their name on the front cover...

So who’s Heywood Innovation anyway?
Having produced around 100 printed annual reports and 20 HTML reports since we founded the business in 1989 and accumulated 15 awards, I guess we’ve learned a lot about what makes a great annual report and what can be done to ensure a trouble-free production. Some say we’re the most experienced online reporting team in Australia but I’ll let you decide that.

Happy reporting in 2008.
Tony Heywood

Dazed and confused? Need a Panadol? Got a reporting problem that needs fixing? Email tony@heywood.com.au for some quick relief.

View some of Heywood’s work on www.heywood.com.au

Tony Heywood is a Fellow of the Design Institute of Australia, founder of Heywood Innovation in Sydney Australia and joint founder of BrandSynergy in Singapore.

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Environmental Impact

I hope the following information will make people realise how necessary it is for everyone to adopt a more responsible attitude to paper production and consumption - particularly when it comes to companies communicating with their shareholders.

As reported by Clean Up Australia ... The manufacture of 26 sheets of paper produces the same amount of greenhouse gas as driving your car for 1 kilometre. When you consider that the average size of a company annual report is around 82 pages, shareholders will make a significant gesture to saving the environment by going online.

Global warming and environmental damage are now hot topics which cannot be ignored.

A company’s social and environmental involvement has become an essential component of its corporate communications, resonating with shareholders, stakeholders and the broader community.

Research by Chartered Secretaries Australia has revealed some alarming statistics:
> 1 tree is used to produce 100 copies of an average size annual report (83pp)
> the average print run of a Top 200 Australian company is 186,000 copies = 1,853 trees per company

also ...

> More water is consumed to produce one tonne of paper than any other commodity – this equates to
around one litre of water for every seven sheets of A4 paper produced = 1.1 million litres of water per
Top 200 company to produce their annual report. In addition to this, the water used to grow trees in renewable forests is greater than indigenous forests, thereby adding to the environmental impact.

> The chlorine bleaching process of pulp for the production of paper has harmful effects:
Pulp mills that use chlorine compounds to bleach pulp produce chemicals called organochlorines. Among the most deadly organochlorines are dioxins: potent, toxic chemical by-products of chlorine bleaching that get into the air, water, soil, and food chain. Over 1,000 different organochlorines have been found in chlorine bleached pulp mill effluent. Hello Tasmania, are you listening.

Once released, these chemicals persist in the environment, spread through the food chain, accumulate in fatty tissues and disrupt, mimic, and block the hormone systems of living organisms. Hormones actively regulate the reproductive, learning, behavioural and disease fighting capabilities of humans and wildlife.

In its three-year assessment of these pollutants, EPA scientists warned in 1994 that minute exposures to organochlorines can lead to cancer, loss of reproductive capabilities, developmental and behavioural disorders, learning disabilities, birth defects, and damaged immune systems. Thirteen years later who knows what damage has been done.

other links: http://archive.greenpeace.org/toxics/reports/gopher-reports/chlora3.txt

> Pulp and paper production is an energy-intensive activity and energy costs can represent up to 25% of the total manufacturing cost. It takes 13.5 GJ of energy to produce one tonne of paper. This is equivalent to using 552 litres of heavy crude oil.

> The printing process is wasteful – paper is wasted setting up the printing press before the print run commences and also on over-runs.

> Because of the high cost of reprints, companies tend to over-order ‘to be on the safe side’.

> In 2001-2002, 1.51 tonnes of greenhouse gases were emitted per tonne of paper produced. This is equivalent to 5 million cars driving from Sydney to Perth (4110 kms).
(http://www.paperonline.org/enviro/level3/issues/issues_frame.html)

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Change in Annual Reporting Legislation – a Real Opportunity for a PR Disaster

There is a fear that if communication with shareholders to inform them of the legislation changes is not handled competently, there is a real opportunity for a PR disaster, resulting in bad press and shareholder angst.

Shareholders can be disenfranchised, claiming that the company is trying to take advantage by not adequately informing them and trying to save money at their expense. This can be particularly sensitive where shareholders are also customers of the company in question. The media can then take the company to task.

Communication is the key
I believe every effort should be made to ensure shareholders are aware of the Legislation changes and the reasons why the company is adopting a particular approach.

40% response from shareholders
Heywood Innovation has already made inroads to reducing quantities of printed annual reports in this area. A recent initiative to shift shareholders to accept online reporting through an environmental focus achieved a 40% response from shareholders.

Click here to view the Tamaya Resources case study

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A Holistic Approach to Investor Communications

I have read numerous articles in recent months that suggest a divide between companies and their shareholders. This should not be happening. The Directors and Senior Executives are appointed to run a company and deliver returns to shareholders who have contributed hard earned money in the hope of better returns than a bank can offer.

The crux of the matter is the dialogue between the two. The more open and informative this dialogue the happier the shareholders are likely to be, which means engaging the shareholders in communication.

Historically the annual report has been embroiled in legislative compliance making it bigger and more difficult for the average shareholder to understand. The recent change in Australian legislation (permits listed companies to publish their annual reports online and only supply printed reports to shareholders that specifically request them) provides the opportunity to look at the entire shareholder communication more holistically ie to stand back and assess the effectiveness of the communication in engaging with the shareholder as well as the effectiveness against the dollar spend.

Many companies are slow to pick up on this new opportunity, happy to continue with the status-quo because that is what they know and are comfortable producing. In reality, they are uncomfortable with the change process. This comes at a cost to both the company and its shareholders.

Many consultants are unaware or reluctant to offer appropriate advice, as it comes at a cost to their own service. Many PR companies are unaware of how new media can be used effectively and to deliver cost savings. Designers, printers and share registries all stand to lose by the reduction and emphasis on print. This perpetuates uneconomical and environmentally damaging practices.

The environmental benefit is one that very few people are looking at or even concerned about. Click here to read more on the environment. (Click here to environmental issues on article below)

Some companies have adopted practices that deliver staff bonuses on savings made against a nominated budget, driving them to seek lower prices often at the cost of effective communications.

So how can companies create effective dialogue with their shareholders?

Making the most of technology today means using the internet instead of printing and mailing. Digital technology is now used for printing small quantities cost effectively. Consider separating the legal compliance from communication to more fully engage with shareholders eg communicating the achievements and future prospects of the company.

Online best practice does not include uploading a PDF of the printed report. Shareholders now demand faster and easier access to information. Companies also need to keep in mind the sight impaired and provide an online solution that can be accessed by electronic screen readers. Further engage shareholders with a video presentation from the Chairman or CEO or both. Give shareholders the opportunity to communicate via email - this is non-confrontational and gives recipients the opportunity to think about their response. Adopt online voting instead of the traditional printed proxy forms. AGM presentations should be webcast, so that non-attending shareholders do not feel disadvantaged.

Think outside the square. Put yourself in your shareholders’ shoes.

Companies need to focus on effective communication not the cheapest.

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