November 27, 2013

Why are American annual reports so ugly?

After reading a few annual reports made by Canadian and US companies, I've realized that they are horrible compared with annual reports from companies in Sweden. For example, the latest annual report (10-K) from Tesla Motors looks like this:

Tesla Motors annual report. Source: Tesla Motors

The total report is 172 pages long and each page is filled with a tiny text. It's not impossible to read it, but almost impossible, since the optimal length of a line of text should be 50-60 characters and the number of characters per row in the report is 140. You can compare this report with the annual report from Volvo (famous from the van Damme commercial):

Volvo annual report. Source: Volvo

The total report is 190 pages long, the text is as small as in Tesla's annual reports, but they have split the text into three rows to make it more readable. They have only 40 characters per row. You may think the difference between Volvo's report and Tesla's report is because Tesla is a smaller company, but smaller companies in Sweden have the same layout as Volvo and the report from the large company Coca Cola has the same layout as Tesla. The minor difference is that Coca Cola has a more readable report called "Annual Review" which is more readable but doesn't include much information.

So why are American reports so unreadable and reports from Sweden so readable? According to The American, the answer is cost-cutting and Sarbanes-Oxley. In the 1990s, American reports used to look like Swedish reports - they had photos, colors, and were more readable. Then the large corporate scandals happened, like Enron, and US decided to pass the Sarbanes-Oxley bill back in 2002 to increase the public confidence in public companies and American financial markets. 

The Sarbanes-Oxley bill said that CEOs and CFOs are required to certify personally the accuracy of the financial statements. US companies also had to disclose more information, including full reporting on the effectiveness of their internal financial controls. So companies decreased their effort to present financial information in a way that makes sense to individual investors. According to research, only 7.7 percent of American annual reports are "reflecting well on the company whose name is on the cover." So the bill had almost the opposite effect. 

The second reason why American reports are ugly is, according to The American, because good-looking annual reports take longer to produce and are more expensive. The 10-K takes about 2.7 months to produce, while the traditional annual report takes 3.7 months to produce. A 10-K is also about 50 percent cheaper to design ($20,000 - $40,000 vs $60,000 - $80,000).