Annual report season is approaching fast for December year ends. Most companies will be looking to improve on last year, to communicate more clearly and concisely what they’re trying to do and how well they’re doing it.
Often, that process focuses on the technicalities of corporate reporting: linking strategy to your KPIs, integrating sustainability, reviewing your risk disclosures or refreshing your business model. That’s all necessary and we’d encourage you to do it.
But there’s something else you can do, which could massively improve your report and even boost your share price: use different words.
Are you suffering from FOG?
Grab a random selection of FTSE 350 annual reports and we’ll bet at least half will have writing like this:
“We continue to invest to enhance our capabilities, enabling us to offer truly end-to-end solutions that drive transformational change for our clients and meet their rapidly evolving needs.”
Sound familiar? If your annual report falls into this camp, you’re suffering from what Rittenhouse Rankings calls FOG – Fact-deficient, Obfuscating Generalities. And that may affect the way your investors perceive your company and its performance.
The link between candour and share price
Every year, Rittenhouse Rankings reviews the CEO letters of 100 major US companies, analysing the language they use in relation to seven core areas:
- capital stewardship
- strategy
- vision
- leadership
- accountability
- stakeholder relations
- candour
Rittenhouse then breaks down each area into ten or more topics, which researchers have identified in the executive communications of successful businesses. The marks companies receive depend on the quality of their reporting on these topics.
For example, one topic covered by capital stewardship is “financial and operating goals”. Rittenhouse scores this as follows:
“Analysts will award points whenever a company reports on a financial or operating goal and grant additional points whenever a goal is quantified. For instance, a revenue growth goal of six percent will trigger more points…
“The principle … is that companies reporting numeric goals are likely to be more accountable and execute more precisely than companies which report only qualitative goals and those which fail to report any goals. Companies that go further and tell readers if they met their stated goals will earn additional points.”
Rittenhouse Rankings 2014 Candor & Culture Survey™
Conversely, companies lose marks for the following sins, many of which are found in our (fictitious) example above:
- clichés
- euphemisms
- contradictory statements
- business jargon
- confusing explanations
- omissions of key ideas or facts.
Rittenhouse then ranks companies on their net scores. Its analysis shows that:
“The highest-ranked
[i.e. top quartile] companies have consistently outperformed the market on average by 6.0 percent over the past decade and by 9.5 percent over the past five years. The bottom-ranked [i.e. bottom quartile] companies have on average underperformed the market by 3.4 percent over the past decade and by 5.6 percent over the past five years.”
Rittenhouse Rankings 2014 Candor & Culture Survey™
Compounded over five or ten years, those are huge differences in performance. Can that all be down to the quality of reporting?
So what’s going on here?
It’s tempting but too simplistic to say that clear reporting is solely responsible for this share price performance. In fact, some of the outperformance may be because better performers are willing to say more, with greater precision. They don’t need to use opaque language to disguise what’s going on.
Even so, we think there are important lessons here for companies looking to write better annual reports.
Good writing equals good thinking
We’ve talked before about how the quality of your annual report reflects the quality of your strategic thinking. After all, you can only write compellingly about your strategy if you understand that strategy and why it’s right for your business.
Writing like our fictitious example comes about because companies don’t think about what they really want to say. Hiding behind jargon and generalities is easier and has the appeal of sounding superficially impressive – until someone asks you what it actually means. The fact that language influences the way we perceive the world makes this self-reinforcing. If you speak or write in clichés, you’re more likely to think in them too.
Lesson: The first step to a better report is to think – hard – about what you’re trying to communicate. Make sure that thinking time is built into your schedule and that you agree the messages before you start drafting.
Too few companies define their tone of voice
Bad writing often comes about because companies don’t taken the time to clarify how they want to write. The result is that authors fall back on a default business speak, using clichés and the passive voice to inflict maximum tedium and minimum meaning.
Annual reports are particularly prone to this because they have multiple authors and even more reviewers. The prose gets worse with every draft.
Lesson: Define your tone of voice and train your authors in how to use it. Done properly, this will hugely improve the drafting process and the final product. It will also give you a stick to beat that troublesome executive who can’t write but won’t let you edit their work.
Language affects corporate culture, which affects performance
The way leaders talk about the company both reveals and strengthens the corporate culture – for better or worse. That matters because corporate culture directly affects corporate performance. According to Rittenhouse Rankings:
“Because candor scores are based on executive language, they offer unique insights into the “soft” drivers of performance and culture, such as empathy, emotional honesty and intelligence, authenticity, connectivity, creativity, innovation, consciousness, purpose, moral authority and courage.
“The presence of these qualities strengthens trust and their absence weakens trust. And it is the tone at the top – evident in the communications of executive leadership – that will determinate the strength or weakness of these qualities.”
Rittenhouse Rankings 2014 Candor & Culture Survey™
In other words, the quality of your company’s writing is an indicator of your management’s trustworthiness and their ability to lead an organisation that creates value.
“Executives who choose to obfuscate will be handicapped in creating trust and engagement with stakeholders. Companies with trust-deficient cultures will be more likely to report disappointing results. A significant lack of candor over time can foster toxic cultures that will erode shareholder wealth.”
Rittenhouse Rankings 2014 Candor & Culture Survey™
Lesson: Your senior management would probably be shocked if they realised that your company’s writing made them look untrustworthy and that it was having a negative effect on your culture and performance.
A more open and accessible writing style will reassure your investors and help to inspire and engage your people. Remember, that well-defined tone of voice is equally useful in your internal comms.
If you can’t trust the words, can you trust the numbers?
No set of accounts is purely objective. Every year, your management must make accounting judgements that can fundamentally change your reported results. An aggressive culture can lead to aggressive accounting and tough times can lead to ‘judgements’ that cover up the problems.
“Investors often forget that financial accounting is a product of the integrity of the corporate culture. Accounting numbers are the result of numerous decisions made within a company about how and where to report cash and turn it into earnings.”
Rittenhouse Rankings 2014 Candor & Culture Survey™
Lesson: Vague words can be more than a sign of vague thinking. Your investors might think you’re deliberately shrouding your performance in FOG. Clear targets and unambiguous explanations will increase investors’ trust in all aspects of your corporate reporting.
Read more
Check out our other blog posts on corporate reporting.
Talk to us
We’re probably the UK’s best-qualified annual report copywriters. We can write your report or advise you on the content and best practice. Contact us to find out more.
