Iridium: What are you looking for in an annual report?
Cato: The language has to be easy to understand; it must inspire me to tears or to walk taller; or make me feel that there are human beings there in the company who hurt or care if the company performs poorly.

Iridium: How many reports do you review for your annual ranking each year?
Cato: Between 300-500 each year. (As many as 800 one year.)

Iridium: What methodology do you use to rank them?
Cato: I look at 36 categories, from the cover to shareholder letter, to whether they shed light on the competition.

Iridium: Are there any clear trends emerging?
Cato: Casual attire has made its way into the CEO photos.

Iridium: How has the Enron debacle effected the annual report since?
Cato: Auditors are demanding at least another four pages of footnotes, which is a negative for those of us who advocate economical word usage. I’m predicting the average report will increase from 58 to 62 pages this year.

Iridium: What are the biggest or most common pitfalls for anyone considering the first stages of their annual report?
Cato: The annual report to shareholders of publicly held companies—it isn’t a job for amateurs. The key corporate communique is a complicated, terribly esoteric product. Those who are tapped by their companies to work on the annual report have achieved a great height for a corporate communicator.

Iridium: Does the inclination to be vague damage the general credibility of corporations as a whole?
Cato: First off, it helps to understand why vagueness exists: It’s because many annual report writers are working far in advance of having the actual numbers in hand, so they’re writing “by the seat of their pants,” as I call it. Also, my experience with corporate executives—which I indeed was, years back—is that precision with words isn’t their bag, first off. Secondly, a terribly precise word makes many (if not all) executives nervous. Vagueness is, I’m afraid, the byword of loads of corporate officers. Second, I’m convinced the corporate credo is, “When in doubt, obfuscate.” “Do we have to say this so directly?” is a question I frequently was asked. “A loss is a loss is a loss?” Not to corporate executives. It could be, for example, “a temporary glitch in our long-term plans.”

Iridium: Your research seems to suggest that there is a correlation between good reports and financial performance. What is the market effect of a good annual report?
Cato: For several years, I did a spreadsheet to track if a correlation existed between an annual report I named a winner, and an industry-besting price-earnings ratio. For instance, if the American Express report makes the world’s 10 best (as it did years back), is that honor reflected in its P-E ratio? I suspected—and I was right, as it developed—a time lag of, say, three or four years would exist. It would take that long for the message of new management, say, to get down through the ranks. To convince those who make the engine purr that this indeed is a new ball game. In every instance, my surmission proved right.

Iridium: As long as annual reports function as a promotional tool and are also used for financial disclosure, can there ever really be any absolute truth or honesty expected? Aren’t these two objectives in conflict?
Cato: In theory you’re right. But there is no substitute— none—for total, unequivocal honesty. Of course, a company should put things in perspective. “We had an awful year. But so did others in this industry, and it wasn’t so bad as it may appear on the surface. Let me explain.” That’s the approach an honorable company, and an upstanding CEO, should take. Drama? It should be held to a minimum. Full financial disclosure—that’s where it’s at. Or, at least, that’s where it should be at. For most, the company policy is, “When it doubt, obfuscate!” I say those kinds of CEOs should, and will, go the way of the dodo bird.

Iridium: You encourage approachability and accessibility of language and content. Any progress in the last 20 years?
Cato: Over these last two decades, truly outrageous writing is on the decided decline. I believe professional wordsmiths are becoming emboldened to write so their words can be read, comprehended—savored, even.

Iridium: In our media and market-savvy culture, communicators understand the basic principles involved in capturing and keeping attention. What explains the inability of many annual reports to do so?
Cato: I had a chief operating officer who would weigh in with “what my wife thinks we should do.” It goes without saying that a weak-kneed communicator can be driven batty by all the many opinions. The good company has a one-person approval committee—ideally, the chief executive. Cost factors always are a burden, if a necessity. Many corporate staffers are too close to the company to truly comprehend what its story is. And if a budget is tight, and vendors are selected on the basis that “cheap is better,” you can pretty much guarantee the report will be wanting. Keep in mind it has not only a year-long shelf life, but it’s an historical document for the ages. Its impression is lasting.

Iridium: We hear stories all the time about multiple copies of annual reports mailed to the same address, only to be discarded without even being opened. Given the overwhelming amount of clutter in direct mail marketing messages, are printed annual reports distributed by direct mail even relevant?
Cato: First off, that several copies go to one home is a result, obviously, of there being several addresses on file from the various stock purchases. Solution: Keep one, toss the rest. I tell groups of investors that if a company doesn’t know enough to make its annual report cover say, “Open me! Read me!” you should reward the company by—heaving its unopened document in the nearest waste receptacle.

Iridium: Why are there so few online annual reports, and why are they so inaccessible?
Cato: It’s a case of “never the twain shall meet”. The producers of print annuals and those wired tech folk people different worlds. When I criticize an online report for taking interminably long to access, the print people immediately notify the techies. Who, I’m sure, wonder what all the hullabaloo is about—“so it takes several minutes to download stuff; why can’t Cato and his ilk be patient?” That’s not the worst of it: Few if any corporations have an online annual report per se. What they have is a corporate website that may or may not present, easily accessed, the annual report online. I’ve played countless guessing games, often giving up in frustration at not being able to find the annual online.

Iridium: Through significant developments in software, designers are able to achieve cinematic experiences, offering sounds and animation which would be potentially more powerful, even interactive for the end-user. These presentations can move investors to tears, but the format for annual reports remain predominantly static, traditional presentations in print, often with obscure online links. Is the industry innovative? Why have we not pioneered new applications of the content electronically on CDROM or online?
Cato: While your ideas have merit, most companies continue to worry lest the Securities and Exchange Commission among others accuse a company of emphasizing flash over substance, of misleading the stockholder. Still, more and more companies are utilizing the Internet to add pizzazz to their print piece. So far, I’ve not heard of any companies being taken to task—though yours truly will, if there’s a chasm between print and online.

Iridium: What predictions do you have for the future of the annual report over the next 10 years? Will there be more efficient ways to deliver this content to shareholders? More data? More truth?
Cato: I believe annuals inevitably will evolve, just as everything else around us does. But I believe there always will be a printed document, its shelf life virtually eternal. More and more companies—virtually all, one assumes—will dovetail the print piece with an online version, hopefully fast, and faster on the uptake than its line after line of windup before the pitch. Fewer and fewer will print their annuals on waxpaper-like stock—or, like Tenneco a few years back, have seven blank pages. Which its since-departed executive VP claimed was intentional, “a cost-savings” maneuver. n

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