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Fooling the shareholders

One company did not mail the copy for shareholders at all; a deluxe version was privately circulated among FIIs instead. Another insisted on a print run that was a quarter of the number of shareholders. Reason: "We can always say that it was misplaced in transit".

Mudar Patherya        Print Edition: November 1, 2007

Mudar PatheryaHaving directly produced more than 500 annual reports in my capacity as chief positioning officer (and promoter) of Trisys, India’s oldest and largest dedicated annual reports agency, I can state unambiguously: not more than 10 annual reports in my experience were created through Trisys with the express purpose of servicing the shareholder. Standard client response: “Saab, annual report padhta kaun hai?”

Then who are annual reports created for? Or for what purpose are annual reports created? Consider my experience:

The one-off annual report

We created a landmark annual report for a fledgling Hyderabad biochemistry company in 1998. Shareholders applauded. Analysts appreciated it. The stock strengthened. The company never came back for another report. No reason.

The skim-the-info report

An Ahmedabadbased pharmaceuticals giant started with the brief: “Let us produce a landmark document.” Midway, the executive assigned slashed non-privileged text. Reason: “Why should I give all this information to my competitors on a platter?”

The upar-upar ka report

Some commodities companies (in businesses strongly regulated by the government) will never go into great detail. “Zyaada bolenge to phir government mein problem hoga. They will say you are profitable, so why do you need incentives. Please write everything cosmetically,” is their brief. Some others make it clear: “Grumbling-mode mein hi likhiye.” When the shareholder reads the report, he disinvests immediately.

The have-a-change-of-mind report

We were commissioned to create a landmark informationrich report for a commodities company, but gradually the censor prevailed. We realised why: the management wanted to buy into its own stock at low prices and any positive message would have made the exercise expensive.

The segregated annual report

The standard industry practice is to produce a skimpy janata report for shareholder consumption and a fattened deluxe version with more information for the prospective shareholder. Reason: shareholders can’t influence stock prices in a positive way; but those who are yet to buy into the stock can. So why waste money?

The information-by-weight report

On a number of occasions, we have been told “Utna hi likhiye jitna mere Rs 7 a copy ke cost mein fit ho sakey”. So information is rationed, pages are trimmed and printing cost strictly controlled. “Zyaada likhenge to mailing cost bhi toh badhega!”

The banker- and lender-centric report

A number of reports are focused on costcutting of a different kind. The exhaustive report is created to enhance lender confidence and mobilise low-cost loans, the differential offsetting the cost of producing the report. The shareholder never gets this copy.

The sales taxwallah report

Some companies focus on low information transparency for their shareholders and sales tax people because “agar sales taxwaalein ko pataa lag giya ki kitna paisa ban raha hai to phir takleef hogi!”

The report as per holding size

A number of companies service their shareholders by their holding size. The 100-500 shareowning class gets the standard management discussion and analysis report, directors’ report and corporate governance report for bedtime reading; the 1,000-plus shareholder receives the more comprehensive equivalent, comprising the business model, corporate strengths, value drivers and risk management.

The report, what report?

One company did not mail the copy for shareholders at all; a deluxe version was privately circulated among foreign institutional investors instead. Another insisted on a print run that was a quarter of the number of shareholders. Reason: “We can always say that it was misplaced in transit.”

The keep-the-shareholders-guessing report

Some companies use confusion as a strategy. A time-share company and a prominent hotels company, for instance, only stated the number of properties in their portfolio but not the number of rooms in their inventory.

The forthcoming issue report

A number of companies suddenly spring to life from oblivion, committing to protect shareholder interests and wedded to governance. Once they mobilise adequate capital using the report, they go back to the skimpy rag that passes off for statutory compliance. Their reason: “We are enhancing shareholder value through cost-cutting.”

The achhi-achhi report

Some reports are suspiciously sanitised. Like a Yash Raj film, everything looks perfect. Until you discover that the company had provided an economic value-added (EVA) section in the previous year, which has gone missing this year. The defence: “Aisa hai ji, ki last year EVA was in plus, whereas this year it is in minus.” Their philosophy: when you have bad news, duck.

The missionary report

We are proud to have created landmark reports for companies like Babhnan and Balrampur Chini in the 1990s. The management’s brief was simple: raise industry awareness. Their logic was that once the level of the water rises, they would emerge automatically as a preferred investment proxy. Babhnan commissioned a research report on the industry in 1993 to “educate” shareholders. Its stock reported the second highest appreciation in 1993—from Rs 20 to Rs 250 (peak).

The suitable hybrid report

Years ago, NIIT produced what is in my mind the ideal mix—a report that controlled cost and yet enhanced transparency. It simply provided a synopsis of various sections with relevant URLs should the shareholder be interested in downloading more information. You could fault them on the ground that not all shareholders would be Net-friendly but not on their neeyat. However, the company discontinued this practice after this.

The edge-enhancing report

Infosys created a landmark report because it was the right thing to do. The information disclosure was clearly benchmarked with the standard of the Western markets. The markets responded with an unprecedented increase in market cap. Infosys did two things right thereafter: it made a private placement at an attractive premium that funded its first campus. It also enriched its existing employees through employee stock options and attracted new employees with the temptation of further disbursement. The annual report played a critical role in the sustainable wealth creation process.

The ambassador report

An increasing number of companies are using the annual report for multipurpose applications. For shareholders to enhance comfort. For media to promote factual reporting. For analysts to compare information credibly. For prospective employees to enhance confidence. “The first thing that we give with our visiting card is the copy of the annual report. We use it most effectively as a brochure,” says one of our regular clients.

Patherya heads Trisys, an annual reports consultancy. He can be reached at mudar@trisyscom.com

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