The cultural context of annual reports

Culture matters. A lot. Our cultural background shapes the way we view the world, what we find “normal” or “strange”. Cultural biases are very strong in human beings, though they can be overcome by awareness and appreciation of other cultures, through travel and exposure to alternative ways of viewing the world.

Culture even plays a very big role in the financial reporting of companies. And not just in the “technical”/numerical sections, where how we keep the score is influenced by the rules and principles we apply to the calculation (US GAAP used in the US, IFRS used in 120+ countries globally, or “local GAAP”). Each of these accounting frameworks for reporting to the stock market has its own definitions and calculations of metrics such as “profit”. These might be similar in many cases, but are not fully identical.

Culture is much more evident in the “branding” and contextual sections of the annual report, such as the title that is chosen for an annual report, or the messages from the senior leadership in the “letter to the shareholders”.

Both in my years as an employee, as well as in those as a trainer and external consultant, I have mostly worked for global companies with American roots. I like the optimism, forward-looking orientation, and passion to “dream big” that is embedded in American culture. It shines through in the annual report: much of what the CEO is sharing (in the letter to the shareholders) is about the initiatives the company is implementing, the market opportunities it is pursuing, and the great future that is ahead of us. Some time is spent on recent results, but looking back at last year is mostly done in the “Management’s Discussion and Analysis (MD&A)” section, which is much further down the annual report (the smaller font “technical” section that fewer readers get to).

If we then turn to the annual report of a British company, we will find a Chairman’s Review and a Chief Excecutive’s Review (reflecting the two-tier structure in the UK, versus the Chairman-CEO single point of power in the US) that largely deal with last year’s performance, with possibly a little reference to what this means for the future of the company. The tone of these is much more modest, at times even apologetic, versus their more optimistic or even aggressive US counterparts.

The most overly optimistic annual report title (versus the actual financial results) I have ever seen was in the midst of the financial crisis, in the Caterpillar 2009 annual report: the title “How we win” suggests that the company has done very well, while the financial overview shows a 37% drop in revenues versus the prior year, and a whopping 75% (!) drop in profitability versus prior year. Caterpillar is a global company with clear American roots. Worth going beyond the cover page and the impressive marketing/branding efforts on people and products, to get a more holistic view once you go through the key financials (revenue, operating margin, cash flow from operating activities).

It’s worthwhile to review a company’s annual report, as a shareholder, employee, customer, or supplier. But before you dive in, ask yourself what the context is of the (narrative or financial) messages you are looking at!

Leave a Reply

Your email address will not be published. Required fields are marked *