Annual Reports: More Pages, but Better?
By GRETCHEN MORGENSON
March 17, 2002
Annual report season is well under way, and American corporations, eager to prove that they are not an Enron (news/quote), have promised to increase their disclosure in these missives to shareholders.
But while companies flaunt their new openness — General Electric (news/quote) said "having well-informed, confident investors is a critical management objective" — it is not clear that this year's disclosure is much better than the last.
March is only half over, so investors have probably seen reports from companies with few skeletons to unearth. Because of the way the calendar falls — March 31 is a Sunday — many unsightly reports will come, no fooling, on April 1.
Reports are clearly bigger. The one from the Williams Companies (news/quote), a natural gas and energy trading company, may take the prize for heft. At 1,234 pages, it is more than three times longer than last year's.
Whether Williams shareholders will slog through this tome is doubtful. Most entertaining is management's discussion of what life is like for the company, after Enron. The report castigates rating agencies and banks for suddenly changing the criteria they use to assess risk in companies and whines that perception has become more important to equity investors than fundamentals.
Washington comes in for withering criticism as well. Citing a "highly- charged political environment" caused by Enron, Williams said a proliferation of new laws, rivaling those created in the Great Depression, could make the company assume a risk-avoidance strategy that could harm shareholders.
Carol Levenson, director of research at Gimme Credit, an investment advisory service that focuses on investment- grade companies, said the biggest overall change in annual reports was that companies were now disclosing debt- rating triggers buried in their financing arrangements. These triggers can require a company to pay back a loan immediately if its debt rating falls; they were one of the reasons Enron cratered so quickly. But few Enron shareholders knew about them until the gun had gone off.
In annual reports, Ms. Levenson said, it isn't always easy to find the discussion of such triggers. And their precise financial consequences are not always spelled out, she added.
Companies are also telling more about their bank credit lines, liquidity, and the special-purpose entities that were a major villain in the Enron drama.
Still, Glenn Reynolds, chief executive at CreditSights, Inc., an independent investment research firm in New York, said that for all the talk of a new level of disclosure, it remains woefully inadequate over all. "We're in a market where risks have climbed dramatically," he said. "To have a modest uptick in the level of disclosure is not much of an improvement."
For example, Sprint could have been a lot more revealing about its financing arrangements, Mr. Reynolds said. But he gives the Dana Corporation (news/quote), an auto parts maker, high marks for disclosing details about its bank lines.
Two of Mr. Reynolds' peeves: few companies discuss the risks associated with their financing or trading partners, known as counterparties, and disclosure about asbestos remains obscure.
"You can't even find the word asbestos in Dow Chemical (news/quote)'s quarterly or annual filings," he said.
Perhaps most disappointing, to some investors, was General Electric's report, which promised significantly greater disclosure but did not deliver. Sure, the existence of $43 billion in off- balance-sheet obligations was noted, but because G.E. is a financial institution first and a manufacturer second, its report should contain more disclosure of loan loss reserves and default rates it assumes on the assets it holds.
"I think G.E. is afraid that if you understood their business, you'd look at them more along the lines of the brokerage business, which is not a triple-A rated industry," Mr. Reynolds said. "The bellwether they are, they should be setting a higher standard in disclosure; otherwise people will start to have doubts."
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