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Getting Better all the Time

Done right, annual report is the ultimate corporate calling card. But only a small percent truly excel at it. CE’s 17th annual roundup looks at the year’s best and what each did to ace the test

Assessing and ranking annual reports has never been easy-and in recent years, it’s become a good deal harder.

Why? Compared to a decade or more ago, there are simply fewer out-and-out bad reports being published. Most companies today understand the basics of a good report, and so produce a workmanlike product that does an adequate job.

It would be nice to think that this stems from the influence of these annual rankings-a basic tenet of management, after all, is that you get what you measure. But many factors no doubt are at work here: For starters, investors today have higher expectations about the documents they receive from companies. At the same time, many firms have grown to expect more from their annual reports and now see them as a tool for marketing and recruiting, as well as investor relations.

This general improvement also may be linked to the increasing involvement of CEOs-which, when done right, can help keep the document focused, relevant, and honest. Today, according to Cato Communications research, 82 percent of CEOs are involved in the creation of the annual report, and more than 56 percent take a hand in authoring the shareholder letter. At Ford, which takes the top spot in this year’s rankings, CEO Jacques Nasser “is involved with our annual report team from concept to customer,” according to an executive who works on the publication. “In addition to writing his letter, he reviews and personally approves everything.”

So things are good-but that doesn’t mean they’re perfect. Only about four dozen of the 356 annual reports analyzed this year are ranked as “world class”-meaning they earned more than 100 points on a 135-point scale. That four-dozen figure has been more or less consistent for several years. So, while the middle of the pack has been improving, only a relative handful are truly excelling. In short, there’s still a lot of room for improvement.

1.FORD MOTOR CO. 135 Pts

Ford racked up a perfect 135 points with a report that is engaging and informative, and that fosters a decidedly positive feeling about the company-a task that may be more difficult next year, given Ford’s recent publicity woes.

This annual’s theme, “Connecting with Customers,” builds on last year’s topic, which explored Ford’s heightened focus on consumers. This customer theme is supported consistently and well. It’s the core of CEO Jacques Nasser’s shareholder letter, which manages to touch on such varied subjects as the Internet, safety, and brand management without excessive verbiage. It’s echoed through much of the editorial section, which features full-page photos of real customers.

And it’s on the cover-or covers. The report was produced in a split run with eight different covers, each showing a real customer family. As a Ford staffer explained, “Think of our book as a fully integrated work that tells Jac’s story in words, pictures, and impressions of what a consumer company is.”

The report finishes with an image piece that features big, bold photographs accompanied by some decidedly philosophical-sounding text. It’s the kind of thing that a lot of less courageous companies would steer away from these days-but here, it’s effective and well worth the effort.

2.RLI CORP.  134 Pts

RLI-a property and casualty insurer-opens with a theme that’s hard to beat. The cover shows a traffic sign reading, “Watch for Falling Sky” accompanied by the headline, “The sky is falling! The sky is falling! (At least that’s what some would have you believe.)” Inside, the copy explains that while some bemoan the state of the commercial-insurance marketplace, RLI is on the “bright side of the road” and “uncovers the best opportunities during market turmoil.”

Company executives are visible and articulate. Together, a focused leadership interview with two top executives, and a well-written and well-organized letter to shareholders from President Gerald Stephens, support the overall theme. The message is clear: Even though all is not rosy in the industry, RLI has the experience and expertise to thrive, rather than panic.

The report also does well on the details. Captioned, thoroughly explained graphs up front, an easy-to-locate mission statement, a glossary of insurance terms, and magazine-style callouts in the financial section all combine to make it user-friendly and clear. And a number of humorous variations on familiar signs-such as “Management is responsible for lost or stolen business,” and “Caution: Slippery for wet-behind-the-ears underwriters” are effective in reinforcing the notion that the calmer heads at RLI will prevail over the industry’s Chicken Littles.

3.AFLAC  133 Pts

The duck from this insurance firm’s TV commercials–the one that quacks “AFLAC”-pops up in this year’s report, and that may not appeal to everyone. But that’s a minor point; the pluses here are legion.

The cover theme-”If it ain’t broke…fix it anyway”-provides a launching point for President and CEO Daniel Amos’ substantive letter, which explains that despite a banner year, AFLAC won’t rest on its laurels. Financial highlights in the letter are in bold type, rather than buried, and a small box on the side presents a peer-company comparison of returns. Additional depth is provided in a solid two-page interview with Amos.

Clarity is the order of the day here. The cover folds out to reveal a prominent mission statement and a table of company operations with headings that could not be more straightforward: “What we sell. Who buys it. Who sells it for us. Who else sells it.” Elsewhere, charts are captioned (except for a couple of self explanatory sales-figure items) and the photos of the company’s board members-a fairly diverse group-are run with short, informative bios.

4.COLGATE 127 Pts

It wasn’t that long ago that the Colgate Palmolive report was among the worst-but this year, the company is doing things right on a number of fronts.

The report’s cover is attractive and inviting-a photo of a smiling, sweatshirt-clad woman ties in nicely with the “Colgate People: Powering Global Strategy” theme, and magazine-style “sell lines” give the reader a concise pre-view of the contents.

Inside, things are very user-friendly. Well-captioned graphs, short sidebars with financial and market statistics, and fully explained photos make the editorial sections a pleasant read, and at the same time provide a great deal of at-a-glance information. More information is provided in a glossary, a set of concise bios of directors and officers, and the straightforward but upbeat shareholder letter from CEO Reuben Mark and President and COO William Shanahan. Overall, the report’s accessibility, combined with its extensive use of employee portraits, creates a casual, friendly tone that provides powerful reinforcement for the people-oriented theme.

 5.THE ST. PAUL COS. 126 Pts

The theme of this annual report, and its presentation, are better thought out than most. The cover asks, “Is there an insurance company positioned to compete and thrive in any business environment?” The answer inside: “Without question. The St. Paul.”

That call-and-response device is carried through in the editorial section, with each page bearing a titlesuch as “Specialization? Without question” or “Financial strength? Without question.” Content takes a minimalist approach, saying a lot with few words. Each editorial page has only a few paragraphs of text. Images-including stark close-ups of people-are in crisp black and white. Similarly, CEO Douglas Leatherdale’s presence is strong without being overbearing. He’s seen in a full-page photo and heard in a well-written letter and a two-page Q&A.

This is innovation that works: The report manages to be new and different without being confusing, frustrating, or baffling. It’s a star performance from The St. Paul.

 6.DANA 124Pts

 “Growth. Performance. Transformation,” says the cover of automotive supplier Dana. Inside, each of those topics is explored through the use of a quick intro and several short items and images, creating an easily scanned-even enjoyable–read.

Similar treatment is used in a “Who We Are and What We Do” section, which shows employees holding, standing near, and, in one case, juggling Dana products. Equally accessible is a page listing five key points in the company’s tactical plan (“Repurchase stock as we generate cash,” “Complete integration efforts and realize synergy savings,” etc.), and the progress made in each area.

The report also takes a deeper than usual look at its management team. Alongside short bios of directors, a letter from the retiring chairman, Southwood Morcott, introduces a new management team. Shortly after, a one-page tribute highlights Morcott’s accomplishments. And in an interview, new Chairman and CEO Joseph Magliochetti takes a far-ranging look forward. All together, the report is refreshingly effective at conveying what the company is all about and where it’s headed.

7. DTE ENERGY 123 Pts

A good report makes it easy to find solid information, and this one does so right up front. Spread across the first page and cover foldout are brightly captioned graphs, a table of financial highlights, and a grid showing DTE Energy’s customers and competitors.

Indeed, the entire book is pleasantly informative. In addition to the letter from Chairman and CEO An-thony Earley Jr., which was written with a minimum of obfuscation, there is a collection of what might be called “mini-letters”-short overviews of five business units, offered by the presidents of those units.

An informative interview with CFO Larry Garberding focuses on a recent merger by posing direct questions such as “How are you financing the deal?” and “How will it affect earnings and my dividends?” Photographs of officers and directors are accompanied by helpful biographical data. And, as if to dispel any lingering confusion, the book ends with a glossary of terms clearly entitled: “This is what we mean.”

8 SOUTHERN CO. 121 Pts

The Southern Company has a history of offering up an innovative theme, and this year is no exception. The idea here is that Southern “is not your average Joe utility company”- a concept picked up on the cover with a small picture of CEO A.W. Dahlberg and a caption saying, “This is not Joe.” Inside, photos of employees are all identified as “not Joe”-except for a page of people who are indeed named Joe.

Things are good throughout: The writing is highly readable. Employee portraits are compelling. An easy-to-scan map and table of operations folds out on the inside front cover. And Dahlberg’s letter is accessible and gets right to the point-which admittedly is easy to do when the point is record earnings. Overall, the document is attractive and inviting. Perhaps more important, it leaves the reader with a clear sense that Southern is an organization that’s flexible and innovative enough to keep up in a changing industry.

9. PHILLIPS PETROLEUM AND UNISYS (TIE) 120Pts

Phillips’ theme, “Design for Growth,” is more than an abstract slogan-it refers to the company’s transition to a new business model. In his letter, CEO J.J. Mulva makes the case for this new approach-which involves “selectively creating new joint-venture companies”-before going into the year’s results. Readers can then drill down further into the subject in a two-page interview with Mulva.

In the ensuing pages, the report looks at operations through the lenses of growth and, where appropriate, joint ventures and partnerships. It isn’t particularly flashy, but it is informative. In one section, for example, the text describes a new technology that removes sulfur from gasoline, using straightforward language and a graphic to cut through the complexity. In the same vein, the book ends with a glossary for the occasional reader who may not be familiar with terms such as “K-resin” or “reservoir characterization.”

10. UNISYS

This “electronic business solutions” company’s re?

port does a better job than most of celebrating employees. A small group of them graces the cover, a section inside discusses recruiting and development, and a full spread is dedicated to employees’ volunteer activities.

The real theme here, though, is e-business-a topic addressed in a two-page Q&A with CEO Lawrence Weinbach (which unfortunately feels a little brief), and in Weinbach’s letter to shareholders (which admirably deals head-on with disappointing revenue growth). The editorial section also offers short, tightly written case studies of Unisys clients’ e-business efforts, accompanied by photos of the employee teams involved with each.

Elsewhere, the report gets good marks for a grid that shows competitors and partners in various lines of business, and a “year-in-review” spread that provides a lively, month-by-month look back.


International UPDATE

More reports around the globe were analyzed this year than ever before. One in seven we reviewed (15 percent) originated from outside the U.S.

Yet, only one non-North American report achieved “world-class” status-scoring at least 100 of a potential 135 points-and that was Japan’s electronic component manufacturer TDK. It anchored the year’s list with a qualifying minimum, thus typifying it as a company in a global economy whose borders increasingly are being erased.

Several other reports stood out, including that of Canada’s Aliant (formerly Bruncor), a diversified telecom, which had the world’s fifth best report a year ago and still touched most of the bases this year. Cameco, another Canadian company and the world’s largest uranium producer, achieved a world-class ranking based in part on the two-page glossary of terms and its back of the book “vision/values” section.

Mexico provided both Cemex and Grupo Vitro, which were among the year’s four dozen with admirable performance. Cemex, one of the three largest cement companies in the world, made a repeat appearance from 1998. And Grupo Vitro, a provider of products that range from cosmetic bottles to fiberglass for car hoods to raw chemicals, was a strong contender as well.

With an indisputably liberal slant, Germany’s household product manufacturer Vorwerk is notable for its photograph of two grown, suit-wearing,staid-appearing men engaged in a mouth-to-mouth kiss. That’s certainly a first in the world of annual reports.

So how did this year’s international contingent do? A positive rating indicates presence of the 36 elements we consider important to a meaningful annual report: from 11-year financial data, to extensive biographical data on officers and directors, to heightened involvement-either actual or perceived-of the CEO in the project. Although non-North American reports, as with their U.S. counterparts, showed improvement, they still averaged a positive rating one-third less than reports overall. Their average was 6.9 percent vs. 9.9 percent for this year’s entire universe.


What Makes THE BEST?

Developed in conjunction with Chief Executive, Sid Cato’s selection system awards each report points-up to a maximum score of 135-for having the following characteristics:

1. Action. Graphic and text elements lure recipients into opening and reading the report. Effective readership-enhancing devices include an intriguing cover statement, captivating call-outs and lead-ins, snappy subheads, and bulleted paragraphs. The table of contents should be as comprehensive as that of a magazine, and the layout as compelling. (20 points)

2. Readability. Contains sprightly, clear copy rather than grandiose statements over-embellished with empty phraseology. (10 points)

3 .Information. Fully informs the reader with substantive information presented in a special section, mission statement, and glossary of terms. (10 points)

4. Prospects. Uses a grid or matrix to identify customers and competitors, provide market position and share, and break down operations, results, and prospects. (5 points)

5 .CEO Photo.  Shows the company’s chief executive in a candid, congenial pose, leading off the letter to shareholders. (5 points)

6 .Responsibility. Assumes responsibility, alongside the auditors, for the financials. (Points are currently allocated to category one.)

7 .Biographies. Data on officers and directors extends beyond age and tenure with the company. (10 points)

8 Innovation. Stands out for breaking new ground. (5 points)

9 .Focus. Displays a discernible point of view and clearly articulated, tightly executed theme. (5

points)

10. Impression. Conveys a favorable image of the organization. (10 points)

11 .Disclosures. Offers more financial data than what’s customary or required by the Securities and Exchange Commission and supplements graphs with succinct, explanatory captions. (15 points)

12 .Honesty. Indicates strong commitment and integrity. (10 points)

13 .Involvement. The letter to shareholders and copy evidences CEO involvement. (10 points)

14. Articulation. Clearly expresses the CEO’s view of what the company’s about and where he or she sees it headed. (15 points)

15 .Likability. Contains other elements that create or add to a positive overall impression. (5 points)  

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