The dizzying complexity of corporate financial reports reached a bizarre milestone this spring, when British postal authorities limited the number of HSBC Holdings annual reports their mail carriers could deliver to shareholders each day. Postal officials feared the company’s latest such report, 454 pages, had become so weighty that it would cause back injuries to mail carriers.
HSBC, a London-based banking and financial services juggernaut that grew out of the Hong Kong and Shanghai banking empire, is one of the world’s largest and most complicated corporations. As such, it must disclose enough information—meaning more and more these days—to meet regulatory standards in the United Kingdom and dozens of other countries.
But HSBC’s burdensome annual report signals a growing concern that goes far beyond British mail carriers. Publicly held companies of all sizes in Minnesota and across the United States are dishing out more words and numbers, spurring cries of “information overload” from investors.
Like flooded rivers rushing toward a turbulent confluence, a perfect storm of forces is coming together to drive up the size and scope of reports that companies must provide to shareholders and regulators.
››› A new Securities and Exchange Commission (SEC) rule, effective with proxy statements filed this year, requires analysis of how top executives get paid.
››› In their 10-K annual reports that must be filed with the SEC, companies must now spell out in more detail the “risk factors” they face.
››› Shortened filing periods have left corporate officers with less time to prepare certain reports. When questions arise during the tighter time spans, companies too often rush into print with poorly written, boilerplate-like disclosures.
››› Perhaps most important, these developments have led attorneys to get more involved in financial reports.
“We’re all lawyered these days,” says Linda Kelleher, interim CEO at the National Investor Relations Institute, an association for investor relations professionals based in Vienna, Virginia. When questions arise, Kelleher says, attorneys often opt to file more rather than less.
More Transparency
The situation is shaping up as a classic case of how a noble idea can turn out to have unintended consequences. Many of the new disclosure requirements, developed in a post-Enron age to make companies more transparent, were conceived with the best of intentions. Yet as SEC chairman Christopher Cox points out, the cumbersome and lengthy language of compliance has led countless investors to ignore the reports.
“How many people here actually read all of the stuff that comes in the mail courtesy of the SEC?” Cox asked the audience at a corporate-governance summit meeting in March organized by the Marshall School of Business at the University of Southern California in Los Angeles. “Tell the truth now—how many of you throw it away?” Almost all hands went up.
“If there’s so much disclosure, does anyone read it?” wonders Bob Kleiber, vice president of investor relations at Digital River in Eden Prairie. This spring, Digital River’s 10-K grew to 107 pages from 77 a year ago. Its latest proxy statement was 48 pages, almost twice the size of last year’s proxy.
The trend is catching on: 3M’s proxy statement grew to 93 pages this year from 72 in 2006; The Travelers Companies’ latest 10-K was 266 pages. Last year’s was only 210.
“Too much information is no information,” declares William Lutz, a retired English professor at Rutgers University. Lutz, who is also a attorney, helped write A Plain English Handbook, the SEC’s guide for simplifying the arcane language that characterizes so much of corporate financial reporting.
Plain English, Please
A passionate supporter of the plain-English movement, Cox has renewed the SEC’s unfinished effort of the 1990s to simplify the language used in financial reports. This year, Cox has called Lutz back to work to help the SEC with one of 2007’s most closely watched disclosure mandates: the compensation, discussion, and analysis (CDA) section of the proxies.
This year’s CDA sections have fattened up the proxies, adding 13 more pages to Digital River’s proxy, and six more to 3M’s. Cox strongly supports the new section, which is designed to help stockholders by bringing together in one place their companies’ practices and philosophies in compensating management.
But the SEC chairman says a study of 40 CDAs has brought disturbing news. Clarity Communications, the Canadian consulting firm that did the study, concluded that all 40 “fell far short of accepted standards of readability.” They were packed with “legalese, meaningless jargon, and technical language,” and written as if for the Harvard Law Review, the firm said.
So what could be done to help investors? For one thing, the SEC needs to sustain its renewed battle against legalese. The agency is looking to (among others) Lutz and Eliott Saltzman, senior vice president at Addison, a New York firm that simplifies corporate filings, to come up with a CDA layout that can be used as a model.
Second, companies could help eliminate jargon by bringing on more writing expertise. In the Twin Cities, General Mills does this partly by giving Kris Wenker a key role on the team that produces its financial reports. Wenker, who is vice president of investor relations, graduated sum-ma cum laude from the University of Minnesota’s School of Journalism in 1980. “The journalism student in me is trying for plain English in all communications to investors,” she says.
Third, companies could trim the size of the reports they mail to shareholders. General Mills plans to do that this year by re-turning to a traditional annual report from the 10-K wrap format it had been sending to shareholders. The 10-K wrap, which became increasingly popular in recent years, typically includes a visually appealing, public relations–focused summary of the 10-K report. General Mills’ version included a glossy 15- to 20-page summary in addition to its longer, more technical 10-K. This year, the company won’t send its 10-K to shareholders unless they ask for it; the report also will be available on the Web site.
Lighten Up
Gary Lutin, who leads a shareholder forum in New York, thinks the focus needs to be more on the quality of disclosures rather than on their quantity. Lutin believes that, for now, investors are on the losing side of an arms race. Turning this situation around will not be easy. Lutin cautions that plain English is no panacea. Documents can be written with precision, but still fail to present the right facts.
And Kleiber raises the most unsettling question of all: Is the problem of information overload solvable, given that so much of the information being communicated simply isn’t so simple anymore? Somehow, this transparency thing doesn’t seem to be playing out quite like we thought it would.
