[New post] Insider’s Guide to Annual Reports: What Are They Trying to Sell Me?

Public companies are required to hold annual shareholder meetings for the purpose of electing directors. Before each meeting, shareholders are sent an Annual Report, which must include company financial statements for the year just ended. The report also enables company officers comment on the company's strategy and plans—and not incidentally, send some strong marketing messages.

The Modern Annual Report to Shareholders often looks less like a dreary financial report and more like a glossy marketing brochure.

Yes, the mandatory financials, annotations, and auditor's opinion are all there—usually in black and white and small print. But these are sandwiched between many glossy pages with striking images, creative typography, colorful graphs, and artful prose from the Board, CEO and other officers.

For more in-depth coverage on reading and understanding annual reports, please see the article Annual Reports.

In response to the non-mandatory gloss, report readers naturally ask: "What are they trying to tell me?" Or, more to the point, "What are they trying to sell me?" And, "Do I buy it?"

Annual Reports to shareholders exist because the public trading of ownership shares is a regulated activity, everywhere. Most regulatory bodies have a declared mission similar to that of the US Securities and Exchange Commission (SEC), which is

"To protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation."

In the regulatory context, therefore, the Annual Report's reason for being is to enable investors to make informed decisions when (1) buying, holding, and selling stock shares, and (2) when electing directors.

Understanding these two points can rightfully be called Step 1 in learning how to read an annual report.

Understand the Report's Broader Purpose

Readers know that the report authors—Board members and Corporate Officers—have a strong personal interest in enabling investors to make informed investment decisions and elect directors. To the authors, however, the Annual Report's target audience extends well beyond the investment community. To the authors, the audience includes investors and also the company's employees, customers, competitors, industry analysts, and even the general public.

Readers understand instinctively that for all of these audiences, the broader purpose is to:

These points answer the question raised above: "What are they trying to sell me?"

When reporting after an especially difficult or problematic year, companies use Annual Report comments as a vehicle for rebuilding investor and public confidence in company management and in the company's future. After a difficult year, the intended message is that (1) management understands the reasons behind current problems, (2) management is acting to correct the problems, and (3) prospects for the future are good

Recognizing the nearly universal broader purpose might be called Step 2 in learning how to read an annual report.

Look For Answers to 7 Specific Questions

So, what specifically should the reader look for amid the marketing gloss, essays by the officers, letters from the Board and CEO, financial results, fine-print notes, and auditor's opinion?

In reality, the authors meet the report's broader purposes by addressing a short list of about 7 questions. Reports may vary greatly in structure, length, and writing style, but if you know what to look for in advance, you should be able to see where the authors take on each of these questions.

Is the company . . .

Understanding that nearly all annual reports attempt to address these specific questions can be called Step 3 in learning how to read an annual report.

Do you buy the authors arguments? For more on making that judgement and a complete overview of annual report structure and contents, please read more in the online article Annual Reports.

Take Action!

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By Marty Schmidt. Copyright © 2004-2016.
Published by Solution Matrix Limited.
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