How to draw up a convincing annual report

Interview with Simon Mastnak, a specialist in investor relations management.

Simon, before we kick off this interview, I should briefly introduce you to the readers.

Simon Mastnak first learned about the importance of investor relations when employed at the Ljubljana stock exchange. He later decided to strike out on his own. Today, he gives advice in this field to many Slovenian businesses and also works internationally, including as the partner of Austrian Mansalia, a consulting firm specialising in the preparation of annual reports for companies as reputable as Telekom Austria, Daimler Chrysler and the Vienna Airport.

Simon, how would you assess Slovenian annual reports in comparison with foreign reports?

Slovenian annual reports are generally well-designed and sound, but there is quite a lot of room for improvement in terms of content. An annual report is supposed to present the company’s investment story to investors and other stakeholders or to answer a simple question: why buy a stake or shares in this company? Especially in these hard times when capital is lacking, we need to make use of every opportunity to convince banks and investors that it is our business that makes a good investment and not the hundreds of others vying for that same capital. Slovenian companies aren’t aware enough of this. They are too quickly content with merely meeting the letter of the law. Abroad, it is all about the story designed to convince investors.

Yes, but how does one attract capital when the results in most companies are significantly worse than seen by investors for years? How should the bad news be given?

It is true that nobody wants to disappoint their investors, so we all tend to shy away from bad news. This is what will make communication with investors all the more important this year. I like a comment I recently read in the Investor Relations blog: if a company facing bad news stops communicating, it is like a relation we lent some money to vanishing without a trace when the money needs to be paid back. This is what is experienced by many investors today; the value of their assets fell and they are left ignorant of what will happen to them in the future. Companies must also be able to answer the hardest questions even if the answers are not such as the investors would like to hear.

It sounds logical, but how does one actually say it?

Communication should be clear, the messages straightforward and based on facts. Not wanting to disappoint the investors, many companies make the mistake of trying to shift attention to various less important indicators such as market share increase, which is of no help if the company is facing bankruptcy from cash flow problems.

There is no point in sugar-coating things. This year, there will hardly be a company with only good news to give – it was a hard year for everybody, so presenting poorer results is nothing to be afraid of. Two things are important:

• it has to be explained why specifically the results were worse and what the company has already done to improve the situation and what future measures it is planning,
• companies should not be tempted to make too many promises for the future to investors to offset poor current results. Investors are aware that the situation on markets is not rosy and do not expect companies, which had e.g. 50% lower sales last year, to make up for the loss as soon as this year. The market situation should be realistically and soberly assessed and used to develop a strategy that will be credible for investors.

I agree; right now nobody wants to listen to fairy tales about how everything is going to be fine and dandy, because everybody realizes this is not the case. Nevertheless, investors must be offered some sort of vision, our plans for the future.

Of course. It is vital to include these plans in a coherent report for the annual report to function as a whole. It is important to know what we want to communicate before setting about the job. And above all, it is very wrong to speak about the crisis as an opportunity in one section of the annual report and in another one, three pages on, to ring the alarm bells before bankruptcy …

How does one avoid such pitfalls in practice? In my experience, the content is almost as a rule prepared by a number of people at the company.

I would advise companies to approach the job as a project. A project team should be formed in which the tasks and responsibilities of individuals are clearly defined. Most importantly, the project needs an editor who will give all the texts a common denominator and follow the thread of the basic message. Clearly this can’t be done by someone for whom this will be just an additional assignment in an already tight schedule. In that case, it is better to outsource.

A similar thing applies to design. Investors, bankers and journalists should get the gist of our story just by browsing the introductory pages and good design can go a long way to help achieve this.

Simon, thank you for your commentary.