Corporate MOTing: Hints and Tips on Interpreting Business Reportage Part One: Annual Reports: What Are They Good For? by Doreen Soutar
Mindful consumption is a concept that is increasingly acceptable in the mainstream. We pretty much all have an idea of what a ‘green’ or ‘ethical’ product is like – sort of – and a lot of us would like to buy more of this kind of product, even if we don’t always manage to live up to the image of ourselves we give to market researchers about how green we are.
Now, I am not having a go at you – there are only a select few of us who have been spared the necessity of buying the cheap generic version of a product rather than the premium-priced fair-trade/local/organic/hemp-wrapped/made-on-the-premises-by-virgin-youths version. Sure we would all rather have the good stuff, but being hungry is not a reasonable option to being ethical. And your bum survives being attacked by cheap toilet roll now and again. So going cheap is neither sinful nor unusual.
But let’s say that on a Sunday afternoon you are checking out various places to buy underpants and socks. You can afford to splash out a bit, and maybe buy decent ones that will last more than three washes, so you have the luxury of choosing the seller on the basis of how nice they are. How ethical they are.
How much they care about their workers or the planet. Maybe you don’t want to be wearing budgie smugglers made by a company that also actually smuggles budgies. Feel me? We are just looking at ways to find out just how much of a bunch of bastards the people are that are making the stuff you want to buy.
Now a strategic analysis (spookily enough) is a set of ways of looking at a company that concentrates on the company’s strategy and how successful they have been. This is a particularly important viewpoint if you are thinking of buying shares in the company. Now you and I know that you are only thinking of a couple of pairs of socks, maybe a nice bra and pants set if they have it in your size, so what has the share dividend got to do with you, already? Well, a strategic analysis not only tells you what the company has been doing, it tells you how it has been going about it.
Take the annual report. The annual report is not the only piece of kit that is used in a strategic analysis, but it is a pretty major one with lots of lovely information in it. Essentially, the annual report sets out to be an advertisement that the company puts out once a year to the company owners (the shareholders). So the company tries very hard to make the annual report:
a) make them look good
b) not make them look bad
c) hide all the tricky stuff
d) big up all the good stuff
However, they really need to stay on this side of telling fairy tales and porky pies otherwise nobody will trust them with their share money. This means that some of the lovely information in it is intentional, but some of it is either unavoidable or accidental. Our task is to build a picture of the company by combining these different types of information together. So have your cynical eyes at the ready, and question everything. There is no such thing as a standard annual report, and even the facts and figures can be manipulated.
We are going to be looking at three distinct aspects of the company: firstly we will look at the overall impression they provide and the language, images, and information placement they use to create a corporate image. Secondly we are going to look at the money: how much there is and who’s got it, and why. Thirdly, we are going to check out their moral compass.
Now the first thing you notice about an annual report is how long it is. For example, the Royal Dutch Shell Annual Report is 200 pages long, and this doesn’t include their sustainability record. More on that later. In the meantime, the Capital City Partnership Ltd of Edinburgh Annual Report 2014 is twenty seven pages long. The Royal Dutch Shell Annual Report opens with a picture of two people possibly in their twenties or thirties.
We note that they are not Western Caucasian, there is a fifty-fifty gender balance, and the focus is on the intellect behind the company’s work. This is how the company wishes to be seen. And there is a modicum of truth in it: in what is known as a triple helix, companies such as Shell work with universities and governments to develop how they extract fossil fuels and how these fuels are used. There will be people like this in the company somewhere. They just might not be representative.
In fact, if we look at the AR Senior Management, they are all men (p.62) and all but one of the Board of Directors are male (p.61,62). The female board member is on the audit committee. Not quite as gender balanced as it looks, then. In fact, a bunch of males called names like Andrew and Matthias and Sir Nigel. Which doesn’t sound very ethnically diverse either. So it’s looking like the guys in the picture have little to no chance of reaching the boardroom.
Back at the Capital City Partnership Ltd, the directors are a bit more gender diverse, with a third of them female. There are only three, and the list of their achievements is limited to actually having a name. The Chief Executive is only mentioned later in the body of the report. That’s a man. So now that’s one in four being a woman. And the company secretary is a man. So that’s one in five now. Looking a bit ropey on the gender bias front here. And with names like Jim, Donald, and Frank, here too, we are looking a bit squeaky on the diversity front.
So to recap, after having looked at the front page of two very different annual reports, we can conclude that if you are not a Western white male, the chances of you having any power is slim to sod all. You might get a bit as a woman, but you are likely to be the only female on the board, and outside the main power positions of Chief Financial Officer or Chief Operating Officer. In fact, most women on boards or in senior management are in Human Resources. I wonder why. Here’s a cool scavenger hunt for you: find the companies where there is a female:
a) Chief Executive Officer
b) Chief Financial Officer
c) Chairperson of the Board
So hopefully you are getting the idea that looking at how companies behave is more enlightening than what they make themselves out to be. For example, at least Shell Board members have their CVs listed. In the Capital City Partnership Ltd, we are simply told they are qualified and experienced for the work. Trust them. What could be wrong with a bunch of white guys in a limited company spending council money? Nothing to see here.
Moving along, the quality of the Annual Report can tell you a lot. Take Shell. They’ve obviously had the professional mad men in, haven’t they? Nice photo, company yellow contents page. But look a bit deeper. In fact, look at page 3 of the Annual Report:
Does this not scream global multi-billion corporation at you? Listed for that many types of shares on the New York Stock Exchange, a company that obeys the legal jurisdiction in England and Wales, but is primarily headquartered in the Hague. Now obviously, that is starting to sound a bit tax-dodgy to yer ordinary punter like me, but let’s put that aside for a minute. The way this page is presented shouts clout, power, and success. It might as well say “Big League Fat Cat Tax Form” across the top.
For the Capital City Partnership Limited, the picture is a little different (page 3):
Spot, if you would, the little black marks in the top left of the page, which denotes that a photocopy has been uploaded as a pdf. This is not even an original document. This is an Annual Report of the ‘Cheap Fuck’ variety.
Now, the Fat Cat and Cheap Fuck presentation styles in annual reports are not necessarily a bad thing in themselves. I wouldn’t mind a Cheap Fuck version when reading the results of a refuge, for example, where every spare penny went back into the work they did, and they were about to prove it in the following pages with numbers. I don’t mind a Fat Cat version if it was my wedding organiser, because I want them to be hyper-aware of presentation. But where the Fat Cat version is extracting fossil fuels, and the Cheap Fuck version is a subsidiary of the council (who have a printer or two) that might give us some cause for pause.
So the take away message is: just how appropriately does the company account for themselves? What do they think of themselves and their audience?
Of course, we need to bear in mind the type of company making the report. Royal Dutch Shell needs to keep shareholders to get money to operate. They are a private business, and they need to show their business cohones, as it were. They probably all have a ten gallon Stetson at the back of a walk-in cupboard somewhere in the Hamptons.
Capital City Partnership Limited, on the other hand, have “voluntary income” (council funds), “activities for generating funds” (pardon?), and investment income (for the money they didn’t spend doing what they were given the money for in the first place). Does this sound sneaky to you? Like they are trying really hard not to say what they are doing? A mental image of a little man in a dusty pawn shop with fingerless gloves springs to my mind. Dead advertising executives are turning in their graves, and offering their services pro bono.
So, in short, the Royal Dutch Shell high heid yins are doing everything they can to be noticed as a big player, and Capital City Partnership Limited are doing everything so that they can to slip under the radar.
Let’s go wild and crazy and assume for a moment that the tactics being employed by the company are successful. The reason we would do this is that if we assume they are doing it on purpose for a reason, we can then ask what that reason is. In other words, what is the company’s mission? What are its goals in life? What does success mean for them?
Now in a lot of areas of life – not least research and business – defining your aims and objectives precisely can be a bit of a challenge. “Make some serious folding stuff” may be an absolutely truthful aim, just like “get some bloody answers” is the reason we want to conduct research, and “eat” is the answer in a job interview as to why you want to work for that particular company.
Of course, the question really isn’t ‘why?’ at all; it’s ‘how?’
“How do you intend to pay your bills/get data/do with your company to make money?”
In business, this is commonly known as the company “mission”. I would be prepared to put good money down that there isn’t a business book currently in print that says that every single employee should know what the company mission is, and be working towards it like a little Tasmanian devil. But try finding the mission statement in the Annual Report is like trying to find a virgin in parliament, or some similar concept.
Why is this? Well, having an obvious mission statement gives the senior executives something to fail miserably to achieve, and the shareholders something to point and laugh at. Some companies do do it, and again, like female CFOs and CEOs, it is an interesting treasure hunt finding them. I bet you good money you wouldn’t be able to predict which ones do actually put their mission statement where you really can’t miss it.
I have to say I give these companies a head start, and it is less likely that I would boycott them. Not impossible, but at least even if they do turn out to be a bunch of tax-dodging, granny-kicking bastards, they are an up-front bunch of tax-dodging, granny-kicking bastards.
What are Capital City Enterprises Limited and Royal Dutch Shell mission statements? Well, if you are really interested, you can download the annual statements I have used here. Try and find the missions for yourself. Think of it as a bit of homework. You could even extend it to other companies, and get some practice with going into the corporate sections of business websites and getting your mitts on the annual report in the first place.
And I will see you back here next time for the financial analysis.
Don’t groan like that – yes, we will be using some maths and it is a form of accounting.
And yes, we have all heard the joke that there is ‘no accounting for you’.
But on the upside, you get to see what kind of slick tricks companies pull with the money side of things, and how they can get away with paying no tax. And you can apply this information to any other company you like, not just the ones the major media stations think should be the scapegoats of the day. You can even do it with major media stations.
Yeah. See. Now you’re interested.
Go find some mission statements, and I will meet you back here later.