Business: The Problem With Annual Reports

It's spring, which in corporate America means it's time for the annual reports. If you own a few shares of stock, or someone in your house does, you've seen them. Many are beautiful. Most are banal: full of jargon, vague mission statements and feel-good pictures of smiling customers, spotless manufacturing facilities and diverse employees. Here's Merrill Lynch's annual report, with several pages of beautiful photography. And here's the McDonald's annual—68 pages of good times, good food and good statistics.

It saddens me to say this—especially at a time when people in the word and image trades are suffering—but annual reports are archaic and essentially worthless. Those thuds you hear are hundreds of thousands of meticulously crafted marketing documents being dumped into the garbage can. Given that every American corporation is trying to be greener and save money, it's astonishing that annual reports are still produced.

Once upon a time, annual reports were a necessity. The New York Stock Exchange required companies that listed their stock on the exchange to send every shareholder an annual report—a document offering a state-of-the-company address from the CEO plus crucial operating data. In addition, the Securities and Exchange Commission required companies to send 10-Ks (detailed annual reports shorn of the PR junk) and proxy statements (like 10-Ks but with more information about compensation and the directors up for election). In their day these were highly useful documents: news organizations would keep collections of them, and professional investors could mine them for insight.

But once information migrated online—the SEC began requiring companies to file 10-Ks and proxies in a free online database in the 1990s—the process of printing these 200-page documents on heavy-stock glossy paper and mailing them seemed to lose its utility. Professional investors, as a rule, junk the lovingly crafted annual reports immediately. Hedge funds, mutual funds, and pension funds have no use for them. SEC filings, quarterly reports, proxy statements, or even Yahoo Finance tell you much more about sales and sales trends, results, stock performance, ownership, and executive compensation. And they're all available online, at the SEC or at company Web sites. Professional investors sit in front of screens all day. Ditto the media.

Recognizing this, many companies have scaled back their annual reports in the past decade. They have forsaken the high-concept narratives for what's known as a 10-K wrap—taking the no-nonsense 10-K document filed with the SEC and wrapping it in a few pages of content, usually a letter from the CEO. Fifteen years ago the 10-K wrap was a sign of a corporate hair shirt. In the 1990s, when I interviewed Mel Karmazin, the publicity-shy and frugal CEO of Infinity Broadcasting (and now CEO of Sirius), he boasted that his annual report was nothing more than a 10-K with a cover sheet. Now that's standard practice. According to a survey by the National Investor Relations Institute, in 2006 54 percent of companies reported that their annual reports had morphed into 10-K wraps, up from 47 percent in 2004 and 16 percent in 2002. The percentage is certainly higher today. Among their number: Time Warner and my employer, the Washington Post Co.

But today, even the regulators seem to agree that the wrap is a profligate use of paper. In August 2006 the NYSE dropped its rule that companies must send hard-copy annual reports to shareholders (though they must still provide a copy of audited financial statements on request). The SEC still requires companies to provide an annual report to shareholders. But this requirement can be fulfilled with a 10-K or a proxy. Last year the SEC adopted a new rule that said companies, instead of mailing 10-Ks and proxies, can make them available on their Web site so long as they send notice of the availability of these documents to shareholders. They must still provide hard copies upon request. (The rule became effective for larger companies as of Jan. 1, 2008, and will apply to all companies starting next January.)

Cutting-edge companies are now junking the mass mailing of both annual reports and 10-Ks. Invitrogen, a biotech company that went public in 1999, printed about 21,000 of its 2006 annual reports—150-page books with 25 pages of glossy stock wrapped around the 10-K. Amanda Clardy, vice president of investor relations, figured that about 90 percent of them went directly into the trash. So this year it made a video annual report. For the 3,000 (of 30,000 shareholders) who wanted the 10-K sent in the mail, Invitrogen produced a 130-page document on thin paper. By Invitrogen's calculations the shift saved about 325 trees. Companies such as California Pizza Kitchen and Ruth's Chris have also produced video annual reports. Sure, these videos seem more like advertisements and opportunities to project brand image than serious communications about the state of the company. But that's what annual reports have always been.