William Dunk's 1995 Annual Report On Annual Reports

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Chairman Greenspan of the Federal Reserve and the Beltway Braintrust spent 1994 raising interest rates to cool the U.S. economy--and has promised yet again in this quarter to throw some more ice water on the banking system in order to prop up our currency. CEOs across America have gotten the message, telling us that their major growth for the foreseeable future is to come from sales outside the United States.

A year ago, in this report, we said that American business, after more than a decade of cost cutting, was turning its attention to growth again. Eventually, cost cutting means that you will put yourself out of business. You have to grow to stay in business. But most major businesses are growing 5 - 7%, and even so-called growth companies have a hard time grinding out 20% growth.

Emerson Electric in St. Louis was most articulate in 1993 about its turn away from costs to revenue growth. It is just as emphatic in 1994: its recipe for growth includes new products, overseas growth, acquisitions, and technology leadership--as it clearly outlines in its president's letter. These revenue strategies will dominate American corporate thinking for the rest of this decade.

But, with Greenspan's Big Chill, international growth is the theme of the moment. About 25% of the companies we surveyed referred to global initiatives right on their covers--many more highlighted international inside their reports. Pictures of the globe dot the pages of report after report.

Warner-Lambert is "Winning Worldwide." Becton Dickinson is responding to the "rapidly changing global health care market," noting inside that non-U.S. operations now account for 44% of sales. Proctor and Gamble is "Winning The World's Consumers," while its rival Kimberly-Clark is "Focusing on Growth With New Products and New Geography." So too, with Dresser, Air Products, Sara Lee, Deere, Harman, R. R. Donnelly, etc.

For investors the question is who is talking about international growth and who has it. Many are late to the party, still reporting foreign revenues of 10, 15, or 20% of sales. The companies that are interesting have already arrived--Proctor and Gamble has moved up to 50% foreign, California Microwave has sped from 23% in 1990 to 42% in fiscal 1994, well on its way to a goal of 60%. American Family has built a huge cancer insurance business in Japan, stemming in part from a temporary slowdown in the U.S. a few years back induced by unfavorable publicity.

With all this global ambition, one would think the graphic content of the 1994 reports would have soared to match the grandeur of this theme. But, graphically, this is the most provincial, most mediocre set of reports I have seen in the last 25 years. In 1994, both the content and design of the great mass of reports is tired, and a bit repetitive. It looks almost as if business is running out of new ideas. Suffering an intellectual deficit. Conspicuously pedestrian. I suspect American business is just as tired.

There are some exceptions that display verve and swagger. Both Campbell and its sometime soup competitor--H. J. Heinz--use nautical themes to express their worldwide thrust. On Campbell's cover we find sailboats and an announcement of Campbell's "Global Crusade," as it plants the flag in more and more foreign ports. Heinz salutes New Zealand (where it has been quite successful) in a series of short essays on ten New Zealanders, as well as highlighting its other global initiatives. And on its cover: "Full Sail Ahead in Asia and the Pacific."

Despite the nautical metaphors, 1994 was not a year of smooth sailing for America's biggest and best. Many took bad knocks last year. Some are reeling from the blows. G. E. had its Kidder Peabody. Heinz remarks, "The major overhaul of Heinz, unfortunately, has been overshadowed by a disappointing fiscal 1994. . . ." The chairman's letter of General Mills begins, "General Mills' financial results in fiscal 1994 were disappointing. The results fall far short of our goal of 12% annual growth in earnings per share. . . ." At Sara Lee, "For the first time in two decades, our per share earnings increase failed to meet our internal targets." President Robert Palmer of Digital Equipment says "I am obviously disappointed with these results." Even in large well-managed businesses with diverse revenue streams, the flaws that crop up in a few areas have been deep enough to throw the whole enterprise off stride. This will happen again in 1995.

The reasons for this can be easily seen by looking at the computer business. In effect, global price competition has removed normal margins for error, swiftly punishing enterprises that stray off course. In high technology equipment businesses, in company after company, gross margins are falling. To get rising profits, the companies are cutting S C & A and R & D. In some instances, this means weaker controls and even weaker new product development. In general, this pattern can be seen at Apple, Hewlett-Packard, Analog Devices, Tektronix, etc. Digital's R & D was down to 9.7% of sales in 1994, with a goal of 7.8%. Its S G & A was down to 29.9% with a goal of 15 -18%. What annual reports are telling us is that lush growth margins, which covered up mistakes in the good old days, are gone, making it hard to find some extra profits to cover an operation that has gone south. And business may be starving some of the overhead activities that are bound up with its future in order to get short-term profits. Investors would be wise to realize that the fall in S G& A is not an unalloyed blessing.

Years of cost cutting have sliced pretty close to the bone in many organizations. Some managements are making more of an effort to share credit with employees who are stretched to the limit by all the cuts, looking to create strong collegial feeling which makes extraordinary group effort possible. Digital on page 24 devotes a page to teamwork. Herman Miller uses its whole report to salute different teams working on sundry projects for the company. G. E., long known for a tough, autocratic attitude, is acting like a born-again town-meeting convocation, says "Our 281,000 associates turned in the best performance in the company's history," while underscoring the need for "boundaryless behavior" at every level of the company. General Mills' Chairman's letter is signed by more than the chairman--by the chairman, president, and three vice chairmen--signaling the importance of teams even at the top. Team spirit, it is felt, can overcome shortfalls in resources, in vision, or many of the other building blocks of traditional organizations.

In his 1994 annual report, Charles Almon of the Charles Almon Trust, took note of "a Wall Street Journal observer" who reported "that it was more difficult to make 1% in 1994 than 15% in 1993." The assets of Almon's own fund were off slightly. It was a tough year on Wall Street and on Main Street. Tough to grow.

To buttress performance, America's major corporations are looking overseas for revenues and looking to their employees for very cooperative high performance behavior to overcome resource shortages. Investors can measure Corporate performance abroad, but it's a bit trickier to calculate the amount of cooperative behavior in large enterprises. In the absence of other measures of collegiality, we would suggest that investors look to the degree of employee and of management ownership of the enterprise--high employee ownership seems to induce cooperation. These two indicators probably will tell us which stocks deserve our attention in 1995 and 1996.

We are pleased to see global excellence become the rallying cry of American business. American business, with its huge domestic market, has been slow to grasp the importance of global markets. But the big business story of this decade--at long last--has turned out to be the internationalization of the American businessman. The global theme has only come to the fore in annual reports this year--halfway through the decade--but it is a part of a decade-long march to continue to 2,000 and beyond in the war to capture foreign markets.

Fortunately the U.S. Government is leading the way. The one significant victory of the Clinton administration has been a determined effort of the Commerce Department to put American wares and services in every corner of the globe, finally catching up with the mercantilist policies of Japan, Korea, France, and many others.

This leadership is sorely needed, not just to pry open closed markets, but to light a fire under American capitalism. We must remember that key enterprises such as G. E. still only do 1/ 3 of their business abroad. G. E. and others still are not truly international, even with the call for "boundaryless behavior."

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