REPORTS : Firms Put Best Face on in Annual Reports : Corporate statements: Rare is the chairman’s message that presents the unvarnished truth, harsh though it might be. Many are models of obfuscation.
A Wall Street analyst, once asked what crucial data he gleaned from reading corporate annual reports each year, replied: “I look to see if the chairman bought a new suit.”
He was only half joking. It’s annual-report season again, and serious students of corporate performance know they’ll seldom find new information in the reports, because most of the key data has already been announced.
For the average individual stockholders in the 100 or so publicly held companies in the San Fernando Valley and Ventura County areas, the annual report provides a summary of a company’s year, pictures of hard-working employees or smiling customers, and, yes, usually a photograph of the chairman and the president.
And there’s usually a message from the chief executive at the front of the report. Most times that message is merely the chairman’s opportunity to put the best face on how the company is doing.
“If you as a stockholder think you’re going to get honesty and forthrightness, you need to be re-educated,” said Sid Cato, publisher of an annual-report newsletter bearing his name. Each year, in fact, Cato lists his 10 worst “not-so-artful dodgers,” companies he considers unrivaled for obfuscation.
Particularly at companies that just came through a rocky 12 months, executives--or more accurately, the public-relations people who often write the annual-report letters for them--are masters at finding the words to convince stockholders that things weren’t as bad as they appear, and that the horizon looks bright.
Take Datron Systems Inc., for instance. In the annual report for its fiscal year that ended March 31, 1991, a year in which profit tumbled 46% at the Simi Valley-based telecommunications equipment concern, President David A. Derby began his letter by saying, “We are pleased to report the company enjoyed an excellent year.” One can only imagine what a lousy year would be like.
Or there’s GM Hughes Electronics Corp., a General Motors Corp. unit whose Hughes Aircraft Co. division has facilities in Canoga Park. Chairman Robert J. Schultz’s 1991 letter begins by saying that “revenues and earnings declined to $11.5 billion and $559 million, respectively.” But declined from what? You’ll have to get a calculator, turn elsewhere in the report and figure out yourself that earnings dropped 23% and revenues slipped 2%.
GM Hughes and Datron are not unique. “It goes without saying that the chairman’s letter is going to try to put a positive spin on whatever happened,” said a public-relations officer at a Fortune 500 concern in Southern California, who asked not to be identified by name. He writes his chairman’s annual-report letter, although the chairman, the company’s lawyers and its other brass all get to edit it.
Stockholders who want the cold, hard facts about their company often have to look in the back of the annual report--in the fine print. That’s where companies precisely break down their operating performance over the past year, list their short- and long-term debts, relay whether they’re in trouble with their banks and discuss whether they’re being sued.
Example: Martin Lawrence Limited Editions Inc. The Van Nuys-based operator of art galleries, already struggling from the recession, faced another major problem in 1991 because of a legal fight with one of its biggest sources of revenue, artist Hiromichi Yamagata. Each sued the other during the year over contract disputes.
But none of this was mentioned in Chairman Martin S. Blinder’s letter to stockholders in Martin Lawrence’s 1991 report. Although Blinder acknowledged the “very difficult year for the company,” the Yamagata affair itself was saved for the fine print further back in the report.
Apparently executives also believe that stockholders don’t speak plain English. At any rate there’s precious little such language in the executives’ letters. As earnings go down, so, it seems, does candor in the chairman’s message. “Somebody has to say, ‘Listen, you’re best advised to be honest and forthright in good times and bad,’ ” said Cato.
But too often they use timeworn, empty phrases that, at best, merely apply a glossy finish to the bad news or, at worst, absolve the executives of any responsibility for a company’s problems.
Here’s a sampling:
“Last year was one of transition for your company.” That’s an immediate tip-off that last year was one to forget, and that management isn’t too keen about this year, either. It’s often interchanged with “your company is at a crossroads.”
“Your company is well positioned for the future.” Makes sense, since it can’t do anything about the past, and management presumably has moved on after standing at the crossroads.
At a smattering of companies, however, the annual report message is actually forthright about whether the year was good or bad, and why. Tekelec President Peter N. Vicars, for instance, wastes no time in his message saying that 1991 profits at the Calabasas maker of telecommunications testing equipment “fell short of plan.”
But even the otherwise straightforward Vicars succumbed at one point, writing, “we are a company poised to take advantage” of opportunities.
Sometimes the “well-positioned” phrase means management took some action during the past year--shuttered a plant, closed a division, laid off workers--that it hopes will turn its earnings around this year. But it isn’t making any guarantees.
“We remain confident about the company’s prospects,” goes another meaningless phrase. What do you expect them to say? “There’s nothing we can do. Sell the stock now”? After all, they’ve got to defend their salaries, which, by the way, are not listed in annual reports. Executives’ compensations are in a separate opaque document, the proxy statement, which also is of dubious help to stockholders’ understanding.
Perhaps the best-known example of corporate candor is Berkshire Hathaway Inc. in Nebraska and its billionaire Chairman Warren E. Buffett, whose annual-report letter is written in such a homey, revelatory fashion that it often makes news.
But it’s a rare annual-report message in which executives actually take the blame for a company’s slump. You’ll seldom see: “Your investment lost 30% of its value last year. So, every member of top management is taking a 30% pay cut for one year, effective immediately. It’s the least we can do.”
Most of the time it’s something else from the outside that caused “your” company grief, that was beyond management’s control. That results in this old refrain: “We operated within a difficult operating environment.” It’s the economy’s fault. It’s Congress’ fault. Blame the Federal Reserve. Our unions didn’t help matters. Our customers are having a difficult time.
The Securities and Exchange Commission has been urging publicly held companies to disclose more information about future prospects that might strongly affect their results. Statistics and the footnotes in the back pages of an annual report might not be enough, the agency has said.
But it’s unlikely that shareholders as a group will demand that annual reports be more forthright any time soon. They’ll have to take solace from reading the occasional letters from Buffett and other executives who believe that the more direct their message, the better.
Reading the Corporate Tea Leaves Understanding what executives are saying in annual reports isn’t always easy. Here are some of the more common phrases in their letters to stockholders, and what they really mean:
“Last year was one of transition” and “your company is at a crossroads.”
(Both mean last year was one to forget because the company performed badly.)
“We’re well-positioned for the future.”
(We hope to do better this year.)
“We enter the year facing challenges.”
(We might not do better this year.)
“The company operated in a difficult environment.”
(We’re blaming our troubles on the recession.)
“We remain confident about the company’s long-term prospects.”
(Things can’t get any worse--we hope.)
“Thank you for your continued support.”
(Either: We’re doing great, so you don’t have anything to complain about. Or: Please don’t sell your stock, at least not all at once.)
