Information overload

Information overload

Shareholders welcome greater corporate transparency, but find thevolume of information now required in company accounts confusing ratherthan clarifying. David Allvey argues that shorter, summary financialstatements may be the solution

The toughening up in recent years of UK accounting requirements has generated a huge increase in the amount of information companies have to make public. Full reports and accounts have become so complicated that most shareholders have simply lost the plot and it’s safe to conclude that there’s a real danger the first port of call for important official documents will be the waste-paper basket.

The driving force behind the philosophy of increased disclosure was the perceived need to crack down on the sort of corporate abuses that led to a series of high-profile company collapses in the 1980s. In this context the changes are welcome. But there has been one unfortunate side effect: a neglecting of the information needs of shareholders, both non-specialist and private.

Most shareholders appear to want less volume and more concise and clearer information – the essentials about a company’s financial performance plus a few other key details. What they do not want is all the corporate governance verbiage, for example, or even the plethora of detail on each director’s remuneration package

Nevertheless, shareholders have to cope with the confusing flood of technical information companies are now obliged to include in their accounts. Today’s business practice and the related sophistication of accounting theory, have combined to ensure that the vast majority of current disclosure requirements are aimed at a very small minority of users.

In tandem with these developments, the corporate world has suffered at the hands of the media which has been quick to rally to the post-Cadbury call for more and more information. The theory here seems to be that if you have to declare absolutely everything in the accounts then readers will be better informed and all companies will act in a responsible manner.

However, while it is hard to oppose transparency, it is even harder to see how much of the additional information makes company accounts easier for most users to read and understand.

Surprisingly few companies have so far attempted to put the needs of all their shareholders first by cutting through the maze of technical reporting requirements in annual accounts. According to the recent report by the English ICA, Summary Financial Statements: The Way Forward, only about 30 major ones offer a simplified annual report.

Since 1990, companies have been able to issue Summary Financial Statements (SFS) containing summaries of the directors’ report, profit and loss account, and the balance sheet in the place of, or as well as, the full report and accounts. Most of those that have adopted the SFS have found the information contained within this shorter report has satisfied the needs of over 90% of their shareholders.

There are two basic approaches to using an SFS. The first is to produce both a free-standing report and accounts, and a completely separate SFS which includes the relevant information from the full report. The second is to treat the SFS as the core report, then have a second booklet available on request containing more detailed information omitted from the SFS, so that the two together comprise the full report and accounts. The latter approach is more cost-effective and has proved more popular.

Healthcare company Smith & Nephew adopted the SFS in 1989 and says in the institute’s report: ‘We remain with the SFS approach because we believe that the complexity of modern accounting disclosures militates against clarity of communication. City analysts work quite satisfactorily from our preliminary announcement which simply contains a group profit and loss account, abridged balanced sheet and cash flow, and product sales analysis. We effectively repeat this information along with the explanatory analysis given to City analysts in the SFS enlarged upon in the operational financial review.

‘We are also reminded that 95% of shareholders continue to elect for, and have become used to, a glossy containing the SFS rather than full accounts.’

Indeed, the experience of the 30-plus companies that have already adopted the SFS has been positive. Most agree that undertaking the canvassing of shareholders, required under rules laid down by the Department of Trade & Industry to govern the introduction of an SFS, was an education in itself.

At BAT Industries, we discovered that well over 90% of shareholders were happy to receive the SFS when it was introduced in 1991. That means that out of a shareholder-base of approximately 160,000, just 9,000 require the full document. Our experience mirrored that of other companies.

Many of those adopting SFS have large and varied shareholder bases: this includes British Gas, BT, National Westminster Bank, Thames Water and most of the electricity companies. Addressing shareholders’ information requirements is necessarily costly. Critics on the outside would say that adopting the SFS route has to lead to even greater costs, particularly when you think of the extra administration required to produce two separate documents. In practice, this isn’t the case. As well as providing shareholders with the kind of information they want, companies have reported savings on average of between 20% to 33% in costs through the adoption of an SFS.

Any that wish to follow this route have effectively to obtain permission from shareholders to supply them with a summary by conducting a survey. But simplifications made to the process by the DTI in September 1995 have paved the way for a cheaper, more effective system – it has scrapped the need for companies to provide shareholders with both the SFS and the full report and accounts in the first year.

We discovered significant savings were achieved at BAT Industries in 1991 when the SFS was introduced, even though it took place under the old system. Bigger design and internal management costs associated with the production of the summary were off-set against reduced postage, printing and paper costs, so that BAT achieved a net saving that year of # 200,000.

The international glass company Pilkington adopted the SFS in 1993. It says in the institute’s report: ‘There is no doubting the overall success of the decision to publish an SFS. We now distribute only 3,000 copies of the full report and accounts, despite a shareholder base of over 37,000, and we estimate annual savings in printing and postage alone of # 43,000.’

Among private and non-specialist shareholders, the SFS has been hugely successful. In most instances where the summary has been offered as an alternative to the full report, 90% and above have opted to receive the summary. The institute report underlines previous findings that shareholders are happier with less information than the current trend towards more disclosure in company reports would suggest. They prefer to concentrate on key items such as profits, dividends and general descriptions of performance. Technical information and financial statements come low on the list of reading priorities. Over 75% of shareholders thought that the summary kept them abreast of what was going on in the company, and 25% claimed to use it for share trading decisions.

The original intention behind the SFS was to make the essential disclosure requirements accessible to shareholders in the most understandable, yet concise manner. Unfortunately, many published summaries now run to 40 pages. Indeed, Pilkington admits in the institute’s report: ‘Our major concern remains continued disclosure-pressure to lengthen the document.’

Any increase in the length of the summary would fly in the face of what shareholders appear to be happy with. The report says: ‘There is evidence that the shareholders are more inclined to read a shorter document than a longer one and are generally satisfied with the current length of an SFS. Moreover, very few shareholders do not read the SFS and a significant proportion retain it for some time.’ It is clearly imperative that an SFS does not become either too long or too technical.

The conclusion of the institute’s research is unmistakable. Today’s report and accounts cannot be all things to all people. There may be a very small minority of shareholders who actually welcome the vast array of information but the full report does not satisfy the needs of most users.

The SFS could be the answer as long as the full report and accounts is filed and available for all, including of course the specialist few. If nothing else, companies should be asking shareholders what they want.

David Allvey is finance director of BAT Industries and chairman of the ICA working party on summary financial statements.

Questionnaires were sent to a random sample of 2,000 shareholders from three different companies giving a total distribution of 6,000. There were a 1,596 usable replies.

Most shareholders think the function of an SFS is to enable them to assess company performance and keep abreast of developments. Over 75% thought it was useful in keeping them informed and more than 25% claimed to use the document as one source of information for share trading decisions.

The summarised results, chairman’s statement and chief executive’s review are the most widely read elements of the SFS no matter what the style or length of the document. The financial statements are the least read, along with the auditors’ statement and the board’s committees and policies.

Shareholders are also disinclined to read more financial information than the highlights and profit and loss account. It seems important information must be signalled to them. Respondents indicated some difficulty in understanding the financial statements in the SFS.

Shareholders seem more inclined to read a shorter document than a longer one and are generally happy with SFS as they are. Few do not read it and a significant proportion keep the SFS for some time.

This is based on an unpublished 1995 survey by A Hansford and R Hussey of the Bristol Business School.

58 members of The Hundred Group not issuing summary financial statements responded to the questionnaire survey. 21 had made no board decision on publishing an SFS. 27 of the remaining number were going to reconsider or wait to see how practice developed.

The most important reason for not issuing an SFS was the fear of additional costs, especially in the first year when both the full report & accounts and SFS would have to be sent to shareholders.

Another concern was the complexity of regulations and administration.

Companies were nervous of cutting down the amount of information supplied to shareholders post-Cadbury. Some believed other ways should be found of simplifying information.

The key benefit of an SFS was perceived to be the provision of more relevant and user-friendly information to shareholders. Cost was an important issue for 18 companies and if savings could be proved this would encourage use of an SFS across the board. This would be made easier by legislative changes, and by companies using SFS publishing how much money they had saved.

Many companies stated shareholder pressure would lead to SFS. 14 of 58 respondents had surveyed shareholder opinion and only six of those specifically addressed the issue of publishing an SFS.

This is based on an unpublished survey, C1995 Barriers to Publishing Summary Financial Statements, Report for The Hundred Group, by R Hussey and C Wilkie.

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