Headache? That'll be the annual reports

They may be dry, but company accounts are essential reading

Every October, towards the end of the month, I get an insidious headache. Nothing to do with my body clock or restless hormones. It starts as a nagging drumbeat behind my left eye when I emerge dripping from the shower and realise that this is the day I have to face six piles of company annual reports. It reaches a zenith as I stagger, boss-eyed, from an office near The Monument in London having ploughed through literally dozens of the wretched things.

Every October, towards the end of the month, I get an insidious headache. Nothing to do with my body clock or restless hormones. It starts as a nagging drumbeat behind my left eye when I emerge dripping from the shower and realise that this is the day I have to face six piles of company annual reports. It reaches a zenith as I stagger, boss-eyed, from an office near The Monument in London having ploughed through literally dozens of the wretched things.

Companies spend tens of thousands of pounds - sometimes hundreds of thousands - to produce these annual records of their activities and achievements. They do it because the law says they must, but historically the value of the annual report has always been questionable, all the surveys showed that the majority of investors took little or no notice of them, usually not bothering to read them at all. That's sad because this is the one time in the year when a public company is obliged to tell it like it is.

Fortunately, with the new breed of investor taking a more active interest in the management of his or her portfolio, a resurgence of interest has been noticed and increasingly investors who deal through nominee accounts are contacting their brokers to insist that they receive annual reports for their investments as soon as they are published.

For the last four years I have been invited, in the company of others, to be a judge for the annual ProShare company communication awards. When they first asked me I felt quite honoured and indeed looked forward to the task. Apart from a free ticket to the lavish Park Lane awards dinner in November it gives me a chance, representing the private investor, to pontificate on best practice when it comes to keeping us informed of the goings-on within the organisations to whom we have entrusted our hard-earned pennies. However, I should have known that there is no such thing as a free nosh. Payback time would come and, in this case, it would be in the form of a burgeoning headache.

Never mind, as a selfless soul I am prepared to suffer in the interests of my fellow man and woman, which is why once again I find myself hidden behind a mountain of colourful reports. My fellow judges this year are the stockbroker and investment guru, Jeremy Batstone, and financial journalist Patrick Hosking. Poor fellows, this is their debut as judges so they don't realise that a headache is an obligatory part of the proceedings.

We are all influenced by such obvious yardsticks as overall appearance, neatness of layout, ease of finding one's way around the report, and so on. But inevitably, each of us has his own criteria when it comes to assessing the entries. Jeremy, the consummate professional, takes particular note of the figures and his eagle eye will spot anomalies and - equally important - omissions. Patrick is looking for the story, drawing on his knowledge of recent market news to see whether the document presents a true reflection of the company's performance.

I try to approach the assessment from an investor's point of view, whether it be as an existing shareholder or someone who is contemplating taking a stake in the business. Here are my criteria:

First impressions

Is the cover page clear and welcoming and do the graphics, words and quality of paper create a reasonable image of the company and what it does? Is the brand promoted effectively? Where possible the graphics and photographs throughout the report should relate to the company's activities. They should enhance the text and not distract the reader.

The words

To gain an insight into the company and its services or products I first read the keynote messages from the chairman and/or the chief executive. Are they honest and understandable, or full of platitudes? Are any problems that may have occurred during the year, either in the company or its industry, addressed and explained to your satisfaction? Are management priorities and thinking clearly detailed? Are future opportunities and overall strategy outlined? If appropriate, is there a commitment to research and development? I am looking for jargon-free understandable text that, when I have read the whole report, gives me confidence in the management and the future.

The Figures

For comparison I want the latest figures with last year's corresponding figures running alongside. Everything - sales, profits, earnings-per-share - should be there. And I look for a five-year record of the key figures so that it is easy for me to get an impression of trends . I also like to see details of the high and low price range for each year.

The Basics

At the back of the report I want to see (a) details of where and when the annual meeting is to be held, together with details of the nearest train and tube stations and (b) website and e-mail addresses together with the name of a senior manager to contact for investor queries. I also want his or her telephone number because there are some queries that require a dialogue if they are to be satisfactorily answered.

As the slow-slow-quick-quick-slow train wends its way from Paddington to Didcot this evening I reflect that overall the standards of the annual reports have improved considerably in four years. There are still some cringe-making practices that persist though. For example, deifying the directors by using the camera in an attempt to make them look handsome or beautiful (incidentally, more than one photograph of the chairman denotes a vain chairman or a company secretary who lives in fear of his job). And using words like emoluments when they really mean pay and perks.

What really impressed me this time was the standard of the websites. At the awards ceremony last year we suggested that companies were not paying enough attention to this form of communication and by doing so they were missing an important trick. Sensible investors who research and monitor their shares properly are including company web sites on their list of information sources. The more aware companies realise this so when you visit their sites you will receive up-to-the-minute news and information on what is happening in the companies concerned. Look at the sites of the companies you have in your existing portfolio, if they don't measure up then you probably own shares in outfits that don't pay much attention to the needs of their investors.

* A flurry of e-mails followed my reference, in last week's Diary, to a run-profits-cut-losses investment policy. Next Saturday, if we both survive, I will explain how it works.

* terry.bond@hemscott.net