By Dominic Jones | Published: September 6, 2007 | 
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10-K wraps and unaccountable management
By Dominic Jones
IT’S my view that investor relations at public companies has become more and more a compliance function and less of a communications one.
I think the best example of this is the advent of the 10-K wrap. In just a few years, these phone books masquerading as shareholder communications have gone from relative obscurity to be the most common annual report format among U.S. companies, according to NIRI.
No one with any understanding of Main Street can honestly believe that the average U.S. investor can or will read the things. And if you think they do, then consider the following:
“I’ve been the SEC’s Investor Advocate since January of 2006 and I’m still trying to find retail investors who actually read this stuff.”
That’s a quote from the SEC’s James Freeman in a May 24 speech. He goes on to say that SEC filings aren’t working even for investment pros and analysts.
(I suspect most people at the SEC would feel the same way, too. That’s one reason XBRL will be mandated sooner or later. There’s just no other option.)
So why do most U.S. companies now produce 10-K wraps instead of the more usable reports that they once did?
IR consultant John Palizza has a good theory that is closer to the truth than anything I’ve read from an IR professional in years.
I think there is a connection between the way management thinks and acts towards its owners and how they disclose information to their investors. If company managements think of the company as their own, they tend to view disclosure as simply a bothersome regulatory requirement. Management divulges exactly what the laws and regulations require, and not a single iota more.
John is probably thinking mostly of institutional investors and analysts not getting the information they want. But he is right that unaccountable managements don’t think about their owners’ needs. They only think about themselves.
But I think you also need to look at the broader shareholder community and make corporate disclosure more manageable for people who are not paid big bonuses to endure the torment of discombobulating disclosures in formats unfit for human consumption.
10-K wraps don’t work for most shareholders. Not on paper and most often not online, especially when they’re converted to those quick and overpriced image-based online documents from Thomson Financial, Shareholder.com, Broadridge, mobular technologies, IR Solutions, EZOnline Documents, and all the rest I’ve missed.
For me, 10-K wraps are like a giant loudhailer announcing to the world that management does not respect the role of shareholders. And the vendors that assist in this outrage are their accomplices.
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September 6th, 2007 at 3:49 pm
The way I read the NIRI numbers, you have just alienated 56% of the people reading this story. People stopped reading annual reports long before 10-K wraps came along. Printing glossy reports was a waste of effort and money. The 10-K wrap is a way to cut unnecessary costs.
September 6th, 2007 at 8:31 pm
I agree with Pam - annual reports have limited shelf life and are often an unnecessary expense that many companies can do without
Financial info. on the Internet is readily available, not only from corporate websites but many other sources as well
If a company wants a marketing piece, they should create it - a glossy annual report is a dinosaur
-Rob
September 7th, 2007 at 1:18 am
Pam, Rob:
Perhaps full glossy reports are a waste of money, but there are other ways to cut production costs without adversely affecting the utility and communication effectiveness of the document. Use cheaper paper stock, avoid gratuitous photos, write tighter, plainer content. In fact, you can make a 10-K quite usable on the web if you try. I’ve seen it done very effectively at very low cost.
These things do take more effort and bit more forethought. And that’s the point. There’s no effort and no forethought. Reporting to shareholders, the owners, is not a consideration in 10-K wraps.
September 7th, 2007 at 12:53 pm
Yes, points well taken, Dominic
10-Ks are far from user/shareholder-friendly, and are geared to more sophisticated investors who often pore over the fine print - understandably so
I think companies should focus their efforts more on writing coherent, forthright news announcements and keeping investors updated via their websites and quarterly (if not more often) conference calls and webcasts (that are open to all investors
Annuals are fine, but once again the shelf-life becomes an issue and you are telling investors what happened over a TTM period that is already outdated by the time it goes to press, in many cases
-Rob