William Dunk's 1998 Annual Report On Annual Reports
MIDDLE MANAGEMENT COMES OUT OF THE CLOSET:
China, the explosive dragon, instructs us on the dilemma of American business. We're not up to speed on the Pacific Rim. In our report to you last year on annual reports, (Dunk's 1997 Annual Report on Annual Reports: A Confederacy of Dunces), we said that most American corporations had ample plans and nostrums to guide their operations, but they were in a strategic muddle as to how to come to grips with volatile world markets. This year's report tells us why they're muddled: they lack the skills and the management breadth to comprehend this Brave New World. Our hypothesis would be that you can't run a large business today with strategic clarity, unless you know China and other key global markets. But American business finds itself confronting global markets without global actors.
This year's leading reports are about people--employees. Every 5 or 6 years, one sees an outpouring of reports focused on employees. Usually they come in buoyant economic times when tight labor markets are putting the squeeze on bottom lines. Indeed, now is one of those times, with joblessness under 5%, and wages and salaries up markedly from a year ago.
But, for a change, there are a host of other more important reasons for "people" annual reports besides inflation pressures:
a. Divestitures, acquisitions, layoffs are disrupting corporate cultures mightily. This turmoil is perceived as severely crimping productivity. Talking about people is taken to be an antidote to fragmentation, an attempt to build a culture.
b. Labor shortages are acute in some high-growth areas, with unemployment rates as low as 2%. Skills shortages are worse, with several technology companies lacking software talent to complete major contracts. Some companies are asking Congress to loosen up immigration restrictions, so that they can recruit more foreign talent. Companies hungr for talent want to look people-friendly.
c. Diversity initiatives are gaining ground in major companies, and new policies are being showcased in annual reports and other venues.
d. In a few quarters, there's acknowledgment that many workers have stood still or fallen behind in real wage terms over the last decade, not only because of wage constraint but because of the increasing pressure that the social infrastructure (health, welfare, retirement, and government) exerts on personal real income. Peter Drucker finds the benefit structure of developed countries to be a dramatic source of population control: people can't afford more children.
e. Companies, as well as Mayor Giuliani, realize the renewed need for civility, discipline, and values to make society and make companies run. Some companies connect principles and ethics with people, hoping to create community by showing the community. The 1997 Land's End Report shows and names many employees, while reiterating the founder's eight principles that are taken to be the cornerstone of the enterprise.
With all these complex motives for focusing on employees, a raft of companies have talked about their people this year. Corning 1997, a company that often simply displays high technology pictures, shows and names employees doing wondrous high technology deeds as well as picturing and quoting several key managers. Kimberly Clark 1997 makes clear how global it's become by using Russian, Colombian, German, and Malaysian employees to talk about Kimberly's march across the globe. Likewise, Alcoa trots 3 smiling hard-hats and a lady from Indiana, Hungary, Australia, and Brazil out for its cover.
One other thing makes the current batch of employee-directed annual reports quite different from those that came before. Many of these reports are not so much about employees, as about managers--about the key group of executives just below the chairman. VF 1997 shows the 11 members of VF's operating committee above the text of the chairman's letter. Bank of Boston 1997 spots all its key executives through the text part of the book, but--in case you missed the point--trips out 23 members of the Executive Management Group later in the book. With a bow to its Corporate Management Committee in its shareholder letter, Pfizer also offers us teams of middle managers throughout its book. Having devoted the last 10 years to slicing away layers of management, some companies, at least, are rediscovering middle managers, realizing that they have something to do with consistent performance.
Implicitly these reports are admitting that the real drivers of corporate growth are energetic middle managers equipped with a business education and with interesting tools (e.g., computers and spreadsheets) that were not part of the intuitive vocabulary of their forebears. Several of the media companies are even more explicit about these new managers--"the talent." Primedia 1997 states that its "strong profitability results only in part from our strategy. The other key element is the exceptional talent that we have across all our businesses. . . ." It then shows the young tigers who make it happen in the pages that follow.
One of the best designed, best written reports of the year from the Washington Post makes much the same point in its president's letter and throughout the report. The shareholder letter introduces the writers of the report: "We've asked individuals from several of our businesses to tell you about what they do. You'll find their essays in the pages that follow." By letting some key middling people speak for themselves, the Post provides proof positive that it has talent.
But talent alone is not the question. The question is whether that talent is immersed in global realities and advanced information techniques. What we're seeing in 1997 is that astute CEO's realize that strategic clarity today comes from global awareness built on a globally adept management team. Not three weeks ago, I sat through an all-day strategy presentation of a major company that was flawed from beginning to end. The managers were out of touch with world markets and had no concept about how to get connected. Yet, it's global revenues that drives today's successes. And it's agile global marketeers that create high performance companies. Indirectly, some bright companies talked about just this in 1997.
In General Electric 1997, John Welch talks about the "A" players he needs:
The gating factor in achieving Six Sigma (ultra high quality performance) worldwide, in this view, is the character of GE leadership.
Gartner Group 1997 claims it has to be "Smarter," "because to help our clients make smarter decisions we have to be smarter ourselves." Chairman Fernandez goes on to say, "To sustain our success, we will continue to focus on recruiting, retaining and developing our associates."
Warner Lambert 1997 gets at the question of its global management strength in an entirely different way. It examines its global strategic alliances with the likes of Pfizer, Wal-Mart, and BASF. President Lodewijk J. R. de Vink notes that "By developing the flexibility to meet the supply chain demands placed on us by Wal-Mart, we are now in a position to satisfy the needs of any retailer in the world." Strategic alliances, he finds, are not only a means of harvesting near-term revenues and profits but also a way to create global finesse in his management team.
GE. Gartner. Warner Lambert. Global business today, they say, requires broad managers who can coach, who are terribly knowledgeable, and who can partner in a host of business relationships they don't control. These are some of the imperatives of global business--defining characteristics of post-1980 business which must be 40-60% international in order to truly prosper. Global management may be a sine qua non in 1997, but it's rare, as evidenced by the strategically confused reports we received last year.
Best of Class: Seven Shareholder Value Reports
Every year we search annual reports to see where they're pointed and to see what hints they offer as to trends chief executives and investors should take to heart. This year we'd like to also comment on a few reports that should be read every year, because they're so good, time and again. Curiously, too, you will find that companies with good reports, year after year, often perform well for years on end. These companies consistently talk about the right things. And these reports rarely win kudos in any of the annual report contests. Here are some of the best of breed:
1. Anaren Microwave: Not all the great reports are long, cost a lot of money, and come from famous, sizable companies. Anaren is a defense electronics company that's finally gone commercial--successfully. By showing a little flair in its reports, Anaren has helped investors believe it can be more than an order-taker in the defense business.
2. Berkshire Hathaway: Berkshire's report is the favorite reading for U.S. money managers and has been written up in Fortune. A personal lecture on stewardship by Warren Buffett, the company's head and one of this century's premier investors, this report is a pretty good guide to investing. Cumulatively, from these reports, you can capture the notion that big money is made by making a few big sane bets for a very long time in sectors of business that are headed upwards.
3. Emerson Electric: This is one of America's best managed companies with 40 years of increased EPS, and 41 years of increased dividends. It relentlessly works the right issue. For years it focused solely on being the low cost producer. Now, as religiously, it obsesses on how to grow in a world of flat markets.
4. General Electric: For years, GE was the most sensitive company about what issue to get on next. When it was time to divest computers, it divested. When it was time to be in natural resources, it was in resources. When corporate governance was on the mouths of many, governance glared from its annual report pages. Under Welch, the report hits the timely B-school equations--such as Six Sigma and management development. The Company has moved from portfolio management to EVA acceleration. GE, then, is a way to get a seismic reading on huge multinational business structures.
5. Progressive Corporation: The chairman is an unusual man plus an art and architecture patron. Good art supports the abstract thinking throughout the report. It takes a special man to create a focused specialty insurer, and specialty insurance is where all the real money is made.
6. UICI: Another specialty insurance company, and there's no art here. Just a witty, outspoken chairman. This is one example of a new breed of reports where the chairman writes in a pointed manner about everything under the sun. He's cast off the gray flannel suit.
7. Vorwerk & Co.: Once upon a time, all the interesting annual reports were done in America. IBM, in fact, started modern reporting in the 1950's, but has since lost its way, becoming a wilted follower. But notice, America no longer has a monopoly on good reporting. Here's a bricks and mortar, valves and wheels kind of German company, that captures moods (humor, depression, etc.) in its report, reaching across several borders with its wit and wisdom.
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