NIRI Article’s Annual Report Stats Don’t Stand Up

By Dominic Jones

TELLABS Inc.’s vice president of corporate communications makes a spirited defense of printed annual reports in a cover story for the National Investor Relations Institute’s (NIRI) September 2006 newsletter.

George Stenitzer, an experienced annual report producer and a noted speaker and expert on the topic, cites statistics from surveys with his company’s shareholders as evidence that investors prefer printed annual reports over Web-based ones.

He argues that based on his company’s surveys, the New York Stock Exchange and the Securities and Exchange Commission should back away from plans to allow companies to deliver annual reports on the Internet and only mail print copies to shareholders who specifically ask for them.

Stenitzer cites a range of statistics from his surveys and makes some claims about the usability of online annual reports that are either inconclusive or wrong.

Figures based on narrow demographic

Lets look first at Tellabs’ survey design itself. We are told that “Blackstone Group mailed surveys to 1,200 individual investors out of a universe of 8,262 in Tellabs.”

The fact that people had to respond to a mailed survey should give you an indication of the type of people who replied. The people most likely to mail back survey sheets are probably over age 50 and likely use email and the Web much less than the average person.

They are also likely to be casual shareholders who don’t follow the company’s developments closely. They are probably long-term holders who feel a close affinity to the company, to the point where they were motivated enough to mail back their surveys.

So what we have is a survey with results based on the opinions of a very narrow and specific type of person: Someone who is willing to mail back an unsolicited survey from a company asking about their annual report preferences.

Most Tellabs shareholders don’t care

Now, it’s important to note that there are not many people like those who were willing to return Tellabs’ survey. Stenitzer reports that Tellabs got 147 usable responses out of the 1,200 mailed.

Say what you will about a 12% response rate, that still means that 88% of investors didn’t care enough about the topic — or found the survey methodology too much of an inconvenience — to bother to reply.

In other words, we know that the vast majority of people really don’t see the topic as an issue worth their time and energy. It’s a “non-issue,” as they say.

From this I am happy to extrapolate that if Tellabs stopped sending printed reports to investors by default, the vast majority probably wouldn’t care.

That’s what companies in Canada experienced when they moved to an opt-in model for printed reports in 2004. A study released by the Canadian Investor Relations Institute and Genoa Research earlier this year found very low rates of affirmative requests for printed reports from companies that made the switch, typically less than 10%.

There was no backlash, no riots or petitions. In fact, no noise at all.

A tiny minority will demand printed reports

Of course, a minority of Tellabs’ investors would care and would notice if the company ditched its printed report. But Tellabs’ figures for 2006 say that around 7% of its shareholders (88 out of 1,200) would care enough to ask the company for a printed report if reports were not mailed automatically. The rest wouldn’t care or would go online to get information they want.

These figures are trivial, yet in his article for NIRI Stenitzer relies on them to make a series of broad assertions. For example, he says that companies would have difficulty handling requests from investors for annual reports.

But his own figures don’t support this because they suggest that only a small minority of all investors would care enough to request a report from his company.

Several times he makes a sweeping generalization that “investors prefer print” over the Web. Yet, his figures don’t support this either. They suggest that 88% of people don’t care either way about the topic and only 7% care enough that they would ask for a printed report if one wasn’t automatically sent to them by mail.

The problem is not the Web, but how you use it

Stenitzer also makes statements about online annual reports that are wrong and based on a lack of understanding of how people use the Web. Among the faulty assertions, he says that:

• Online annual reports suffer from “slow downloads and glitches.” This is only true if companies only provide their reports in PDF or similar downloadable format.
• 11-year histories display better in print than on the screen. Actually, you can do many useful things with 11-year histories on the Web that you cannot do in print. You can allow investors to modify how the data is displayed, view graphs and get valuable context without having to flip back and forth in a printed book.
• Reading a long document online strains the eyes. It is indeed harder to read text on a screen than on paper, which is all the more reason you need to write the report specifically for online consumption. But it should also be pointed out that Stenitzer knows as well as anyone that people don’t read annual reports — online or on paper — for any length of time, so eye-strain isn’t really an issue. We know this, ironically, from web log analysis that shows that annual reports are viewed for about three minutes on average.
• Printing online annual reports is slow, costly and bulky. Badly designed reports are hard to print, but not well-designed ones. If an online annual report is properly done, people shouldn’t have many reasons to print information from them in the first place. If they do, a well-designed online annual report will allow them to print only the pages they want. This is highly economical for all concerned.

The point Stenitzer completely misses is that a well-designed online annual report can be a much more convenient and useful resource for investors than even the best designed printed report.

The reason investors generally dislike or are ambivalent to online annual reports is because most companies’ online reports are badly designed, including Tellabs’. The problem is not the Web medium, but that companies don’t use it correctly and don’t fund it properly.

Let’s talk about costs

Cost is something Stenitzer doesn’t address in his article. Printed reports are expensive and wasteful. Based on an industry average total cost of US$6 per book, Tellabs likely spends $60,000 on its printed annual report for a 10,000 print run.

Contrast that with the $200 its online annual report in PDF probably cost. If the company spent $20,000 per year to produce a proper online annual report, it could still save tens of thousands of dollars and at the same time offer investors a worthwhile alternative to print.

The cost savings and opportunity to improve investors’ understanding are there for the taking. Yet companies and IR departments continue to throw away money on printed reports that few people actually use, while completely ignoring the possibilities available on the Web.

Why is this? In part, it is because people like George Stenitzer are given space to make baseless arguments that cannot be supported by the facts. He is a great print report producer, but the era of the print report is gone.

Organizations like NIRI need to come to grips with this reality. It is in their members’ best interests that they stop holding on to the past and start facing the future.

If they don’t, the U.S. investor relations profession is in danger of being left behind.

P.S. I know that my message here won’t make me popular with many in the IR community. I don’t mind that so long as you at least consider an alternative perspective. I also want to make it clear that I respect George Stenitzer’s expertise in producing print annual reports. I have heard him speak on the topic and he is passionate and well-informed. It is just on the topic of the Web where I disagree with him. I do think that if he applied his experience to the Web as much as he has to print, we’d see some great stuff from Tellabs. I would have linked to George’s original article, but can’t because it is available only to NIRI members. And finally, yes, it is true that IR professionals need to get with the Web or risk being left behind. I’m very serious about that.

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