William Dunk's 2006-07 Annual Report On Annual Reports

The Beast in the Jungle

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The Decline of the West.  In 1918 Oswald Spengler celebrated the end of World War I by publishing The Decline of the West, his view that all the West was caught up in slow, inexorable decline, an outlook that resonated widely with the intelligentsia at that time.  It rails against both democracy and the corrupting power of money, with a passion not shared at all by modern day intellectuals.  Of course, Germany defeated felt pretty bad after the War.  By claiming that everybody was in the same sinking boat, Spengler, a German supremacist, could make his dejected buddies feel better. 

But a handful of contemporary thoughtful statesmen and original academics in our own time, not only Kissinger but many others, privately talk about the decay of all our institutions, though still publicly paying lipservice to the idea of continual progress and to the great things that lie ahead for mankind.  For them we are slowly coming unglued. Grandiose pessimism is somewhat back in fashion. 

More sober minds would say that the jury is still out on the century behind us.  Who’s to say whether we’ve regressed or progressed since 1918.  We suspect that the pattern of erosion is a little clearer over the last 15 years.  The end of the Cold War and the triumph of capitalism throughout the world—so overwhelming that it has even engulfed Communist China—has weakened the fiber of the West.  Developed nations appear to have lost their raison d’etre and have been swept off their feet by the rush of digital technology and the fecklessness of global dynamism.  The corporation has become arthritic at the moment that should be its zenith. 

What annual reports over the last 2 years reveal is that the corporation, or the corporation as we knew it, has been caught up in a frenzy of dismemberment and disfigurement that we had not seen before.  From 1975 on, as world markets grew increasingly demanding and political leadership in the western world failed to tend the store, companies in all the developed nations began too chop off divisions, cheapen their product offerings, and, worst of all, strip their middle management ranks, while pretending they were just shedding a little excess fat.  They cut to the bone.  All of this was done with the help of management consultants who offered all sorts of nostrums that ostensibly would turn senile corporations into young studs, but really just put a smiling face on relentless cost cutting.

For some reason, the B-school fad that most sticks in our mind is business process reengineering.  Its chief cheerleader was a onetime MIT professor named Michael Hammer who said the task for corporations was to design out makework that added no value and build orderly, automated processes that led to high value creation.  This effort itself led to a whole lot of makework where the deckchairs got pushed around the corporation, but it did not really much change where the enterprise was headed.  If looked at from the planet Mars, companies seemed to be up to the same things that had kept them busy for decades.  At the end of the day, when re-engineering worked to some degree, it sliced out a chunk of expense and a bunch of people.  It was just a process—not a belief system that would help the corporation to accommodate itself to an entirely new world.

Unfortunately, Hammer, while relentless, was not as entertaining as Mike Hammer of detective story fame, whom history will better remember.  Not only was re-engineering fruitless for society: it was humorless.

The difference circa 2007 is that companies don’t much bother to put a happy face on what they are up to—in their reports or anywhere else.  All the window dressing has been stripped away.  One way or another they nakedly cut inhouse employee cost and shift work to other venues, particularly China and India, but also Eastern Europe, and a host of other places.  By and large, their annual reports have become just as emaciated as they are, a far cry from the days of gala annual reporting in the 1960s and 1970s when the chief executive personally put considerable energy into the written document about his doings.  Then individual shareholders, small and large, rather than hedge funds, were his target, and these shareholders cared about growth and good products, more than margins.  Today reports pour across the threshold  that consist of a hodgepodge of paper directed at regulatory bodies sandwiched to a cover and a president’s letter that do not serve to raise our expectations for the corporation or the economy, but further hint at decline.  Annual report quality has declined at about the same rate as the American newspaper.  Ironically, the newspaper is very much alive and well both in China and India.

Nonetheless, the most astute businessmen heading public companies, both here and abroad, still turn out reports that tell us which way the wind is blowing, point out where we should invest, and imply changes in political economic policy that might make the world hum a little better.  It is the purpose of this report to focus on those few reports that give us some extra insight into the state of business.

A Private Affair.  It used to be that the report to read in America was General Electric’s.  If you read what Reg Jones, onetime CEO of GE had to say, you could fairly well tell what business practices were working and which were flunking, what industries you should be in, and which you should be exiting.  But GE is a trifle passé at the moment.  Today we would have you look at the Washington Post Company.  Even though we think its flagship newspaper is less than its reputation would lead you to believe, we think it’s a pretty good company with a great chairman Donald Graham.

For some reason he’s able to talk straight.  It helps to come from the founding family:  you don’t have to mince words, even if the Bancrofts (Wall Street Journal) and Sulzbergers (New York Times) up in New York are a little tongue-tied.  It helps that he newspapered at Harvard (Harvard Crimson), did some journalism in the Army, and worked as a reporter at the Washington Post.  We like the fact that he was a Washington D.C. cop for a while: that, too, may have helped him learn to talk simply and think clearly.

Washington Post’s 2005 report owns up to a disappointing year and lays out what the company has to do to turn itself around.  It presents the company as a bunch of enterprises built around a newspaper.  Washington Post’s 2006 report shows that Graham knows he no longer heads a newspaper company; now it’s a diversified media and education enterprise.  Kaplan Education has become all important, and the Post itself delivers continuous disappointments.  Of course, newspapers are sinking all over America, and the test of media enterprises is and has been to transform themselves into something dramatically and completely different.  The trick is do it without cutting into the bone, as at Time Warner:  there the products no longer merit our attention or loyalty.

Graham’s most important observation comes near the end of the 2006 report where he laments: 

The Post went public in 1971 and will certainly remain so.  Until the past few years, I’d have advised a company going public that there was no reason not to.

No longer.  The current interpretation of Section  404 of the Sarbanes-Oxley Act has imposed costs on public companies that far outweigh the benefits. We won’t change, but a corporation would need truly compelling reasons to go public today.”

Media chiefs such as Graham, more than most chief executives, realize that whole industries are being turned inside out and that our unrealistic political leaders with pie-in-the-sky thinking are not helping them get where they have to go.

Indeed, Sarbanes-Oxley was put together by two nice, well-meaning legislators, in response to Enron, but it has been a utter disaster, creating huge costs that unjustly reward the lawyers and accountants who are largely responsible for the sins of omission and commission that this Act seeks to remedy.  As is acknowledged by many, it has created an atmosphere in which true disclosure and transparency have diminished.  Moreover, it and poor Federal Reserve policy coupled with egregious errors in tax law have created a boom in private equity.  The big investment gains of the last few years, as a result, have come from investment outside the public equity markets.  Yale University, which under David Swensen has led the pack in major investment gains, has reaped its rewards through handsome diversification outside public equity—in venture capital, etc.  He’s written about this in Pioneering Portfolio Management.

Go Abroad, Young Man.  We’re much less enamored of Warren Buffett than we were in yesteryear.  We say this even though he made us a large packet of money, since we bought into Berkshire Hathaway back in the 60s or 70s when we had no idea who he was.  We probably went negative on him when he gave up his policy of letting his shareholders vote on a proportionate basis on which charities should receive donations from Berkshire:  in our eyes, he simply chickened out and gave up one of his brightest ideas because narrow-minded pressure groups got to him.  We’re even less enthralled that he is now going to give his money at death to Bill and Melinda Gates so that they can orchestrate grants that will ostensibly save the world and the United States.  At the end of the day, this brilliant investor has accumulated a huge bunch of rocks, but there is no clue that he is using his pile to grow the economy and smooth the course of the world.  There is no concept of stewardship. For him we’d recommend a reading of Shelley’s Ozymandias:

My name is Ozymandias, king of kings:
Look on my works, ye mighty, and despair!

He has gotten to think about dying.  Senility has become an attribute of business, as well as an overwhelming problem in all the earth’s most developed nations.  In his current reports, you will find items about succession and about reconstructing his Board as members retire.  He promises to keep to the game he has played—namely making bigger and bigger acquisitions.  At the end of the day his real business is acquisitions.  Some are interesting, particularly as he gets deeper into insurance and energy.

In the last few years, after having been an American First investor for so many decades, Buffett has been adventuring abroad.  Like George Soros, he has fooled around with currency quite a bit, though we understand from his reports that he has closed down that activity after having made some quickie profits.  But he’s also buying into many real foreign companies—an Israeli enterprise here, a dominant Chinese petroleum company there.  For him the writing is on the wall: we have so many basic economic problems in the States that one has to look overseas for greener pastures, an issue he takes up in more than one report.  He notes that the ‘investment income’ account of our country turned negative in 2006, having been positive every year since 1915.  “Foreigners now earn more on their U.S. investments than we do on our investments abroad.”  Basically this stems from our huge trade imbalances: we are buying much more than we are selling. Put simply, we’ve been living beyond our means.  The nation is using its credit card even less wisely than the most foolish consumer.

Before California got so crowded, we would have urged you to “Go West,” as did Horace Greeley.  Now opportunity is abroad, as our economy gets tied up in knots, and the country  becomes the worst debtor of them all.  Buffett makes the same point in his own quaint way.1

He is not alone in his worries about our rising tide of indebtedness.  The World Economic Forum’s Global Competitiveness Report 2006-2007 has some startling news.  Of a sudden, the U.S. has dropped from first to sixth in competitiveness, all arising from this trade leak in our balloon:

Its overall competitiveness is threatened by large macroeconomic imbalances, particularly rising levels of public indebtedness associated with repeated fiscal deficits. Its relative ranking remains vulnerable to a possible disorderly adjustment of such imbalances, including historically high trade deficits.

This reversal of fortunes is truly dramatic.  Surely former Federal Chairman Greenspan saw it coming, knew the jig was up, and went into active retirement, now serving as a high-level consultant to German bankers.  He’s sort of skipped town and become a Berliner.  We think history will eventually look askance at his doings at the Fed.

Old-World Charm.  As the New World dithers, Old-World business is showing us a thing or two.  Print annual reports in the U.S., uninspired, emaciated, poorly designed, mirror enterprises that are mere shadows of their former selves.  GE has slightly improved its graphics, which have always had a 1950s look, but its message lacks crispness, wandering from point to point, trying to touch all the bases, instead of articulating a clear theme.  Along with many other companies, it complains that the stock market is not fairly valuing its growth and earnings prospects.  Other reports are even more lackluster.

There has been tremendous growth of Web-based annual reports over the last 10 years.  This has distracted companies from doing a good print document, which is what all serious investors still read.  And, for all the expense, the digital reports are not very good, mostly because they usually try to put a brochure on the Internet, instead of creating something entirely different based on a new technology.  For the longest time, after the invention of steel, we did the same thing with buildings and houses—trying to replicate wooden or stone grandeur even though the frame was actually steel.  Web reports are a metaphor for the reengineering that never took hold of our economy: new technology is still being used to make old things happen, almost everywhere you turn.

Years ago Emhart Corporation  took several extended bows for putting out rather pedestrian video reports.  The reports weren’t very good, but they got a flurry of attention in the papers, which temporarily gave Emhart a little lift.  Web reports are about the same: so far they sound good in theory, but are generally pretty lousy.

What’s happened in the meanwhile is that corporations, in many other countries, are beating the U.S. in the annual report game as well.  They’ve seized the lead imaginatively in creative annual reporting—a sport virtually invented in the U.S. in the 1950s.  We would refer you to Wolford 2006 in Austria, a lingerie and bodywear company, whose models, as pictured in the reports, will convince you that its products are a must for women who want to hang out with the European smart set.  Fiskars of Finland 2006 celebrates Olavi Linden, designer of many of its tools, as it strives to show investors that it will prevail in the world through creativity and innovation.  It rests its case with a History of Innovation (pp. 23-24) at the company that stretches back to its founding in 1649 and carries the tale forward to 1999.

Year in and year out, our favorite annual report from around the world comes from Vorwerk in Germany.  Making carpets and vacuums and a range of household products, Vorwerk, importantly, has put together a direct selling machine that has now put 56% of its revenues outside Germany in countries ranging from Brunei to Kazakhastan.  Vorwerk 2006 humorously and creatively talks about ‘growth,’ hinting perhaps that one key to its own expansion is its ability to think outside the box much more than most big companies.

More importantly in 2005 it celebrates the fact that it is a ‘family’ company in several senses.  First off it is a ‘family-owned company.’  But, as well, it considers its customer to be the family:

Half the German population still lives in one, gloomy prophecies notwithstanding, and we at Vorwerk have long championed the concept.  But despite the many variations: classic, patchwork, single parent—where would we be without it?  We will continue to give our best for the family.  There’s not much a little humour won’t heal!

The 2005 reports goes on, in the usual Vorwerk way, to impishly contemplate what families are all about.

In fact, great companies think of themselves as families, no matter how big they are.  And they like to help other families.  As some companies put family values aside, this is a point worth understanding.  Just recently, John Deere, the tractor company, which is busy throwing its smaller dealers out of its tent, has recast itself.  Says CEO John Lane, a onetime banker:

For years we talked about Deere as a family….  The fact is, we are not a family. What we are is a high-performance team….  If someone is not pulling their weight, you’re not on the high-performance team anymore.”

The trouble is that teams come and go; families are here to stay.  Deere is currently setting some records, but we won’t bet on it for the long haul.

British Land 2006 celebrates durability that goes beyond Mr. Lane’s timeframe.  It uses portraits from the National Portrait Gallery, an institution founded, like British Land, in 1856.  It talks of the need to create “exceptional long-term investments.”  Strewn through the report are quotes that hint that the present stewards of the company have enough of a funnybone to be free of pomposity.  The report pricks a lot of balloons.  To wit, one Hudson Kearley notes: “When I want a peerage I shall buy it like an honest man.”  And Freud suggests: “Civilization began the first time an angry person cast a word instead of a rock.”  The report implies that business depends on a civilized culture if it is to flourish. It establishes the co-dependency of business and the society in which it subsists. Business, in this view, is not a team sport but a respectful interchange in which all sides win within a village or a nation.

The Social Contract. The corporation, in essence, dates back to the 17th century when the Crown chartered joint-stock companies, giving them a set of privileges and monopoly powers usually in foreign domains.  These trading companies were granted wide powers, virtually creating foreign policy for the king, but it was thoroughly understood that they were agents of the Crown and under its control.  In other words, with all their considerable privileges came obligations to the State.

In the United States, there has been frequent debate about the obligations of a corporation, some saying it is only indebted to its shareholders, others insisting that it had wider inherent ties and responsibilities to the country where it is based.  We would refer you to the Journal of Globalization for the Common Good, which discussed the debate on just this issue between Merrill Dodd and Adolph Berle.  In theory it has come to be acknowledged that the corporation has social duties.  In practice, Boards of Directors have largely been remiss in making sure that any one corporation serves the state and society, as well as its shareholders.

What we learn in many current annual reports is that this neglect of one’s larger responsbilities is coming to an end.  There is no better evidence that we are in a changed world than the 2006 and 2007 annual reports from Wal-Mart which are riddled with references to its social and environmental dimensions.  Right up front Wal-Mart says, “We save people money so they can live better—Wal-Mart’s Mission around the World.”  The index quickly takes the reader to its “ethical standards program,” its “equality of opportunity policy,” its “environment” and “community” initiatives.  It claims it is helping us lead “a healthier life,” and that it is a champion of “sustainability.”  Indeed, its reports are so laden with its social gospel that one could come to believe that it is a foundation or church, not the world’s most important business.  As we have indicated in our “Watching Wal-Mart” section, a goodly part of society doubts its good intent.  No matter how one rates its social accomplishments, it is nonetheless beating the social tom-toms.  If we were to take its annual reports at face value, Wal-Mart is striving to be the super citizen.

Indeed, a very long list of companies that appear to be either socially or environmentally challenged have turned the social corner—at least in their rhetoric.  They have acknowledged that their obligations range well beyond their shareholders.  For instance, one only has to look at the laundry list of major companies on Pew’s Business Environmental Leadership Council to realize that a bevy of corporate leaders understand that they have to get pro-active on global warming and other environmental issues.

Just as surprising, however, are the large number of companies that are more complaisant about their obligations to the community.  At the end of the day, the majority of companies still are casual about what they can and should do for their country.  While many leading companies have adopted a very ‘social’ voice in their reports, a host of others are rather silent about what they’re doing to make the world better.

Beast in the Jungle.  For the last couple of years annual reports show corporations to be caught up in ever more frenetic activity—cost cutting, acquisitions, then more cost slashing—with no clear end in mind.  In general no new business model seems to have emerged: what has occurred at GE and other great companies is constant improvisation to deal with the forces sweeping through global business.  Cost cutting has reached the point of diminishing returns.  Some businesses—say a Washington Post Company—seem to be slowly accepting that they must move to a radically different model, the shape of which is still elusive.  It is clear that, for this company, it has to be wrapped around the new media technologies that have the populace in their grip.

Grudgingly, a corporation here and there has become more global.  Berkshire has put some of its chips overseas.  But only a very few corporations have been smart enough to put at the helm truly global leaders along the lines of Carlos Ghosn of Renault and Nissan who was of Middle Eastern extraction, brought up in Brazil, flirted with U.S. business, worked his way up through more than one French company, and, hence, had the cosmopolitan background to turn around a Nissan.  The test, of course, of a global organization is not the percentage of its operations that are overseas but rather the ease with which its leaders transition from one country to another.2

What some annual reports do make apparent is that the globally conversant, technologically agile corporation which is coming into being will have—for certain—one other dimension.  To succeed in many locales, it will have to have demonstrable social objectives.  Wal-Mart makes this self evident.  It not only is stressing its social goals in the United States, but is emphasizing its responsible character as it tries to further penetrate developing countries such as China, India, and Mexico.

The public company, as we have known it for the last 50 years, seems to be coming to an end.  A new creature is emerging that has global and technological lineaments, wants to do good while doing well, and knows it has to redefine itself, at least in the United States.  It is part of a world that is becoming progressively more unfriendly to the public corporation, such that private equity capital is enjoying all the real spoils.

In 1903 the great American writer Henry James published a novella entitled “The Beast in the Jungle.”  John Marcher, the protagonist, puts much of life on hold, awaiting the ‘beast in the jungle,” the great spectacular event he is sure fate will bring to his doorstep.  Only at the last does he learn what that ‘beast’ is.  His earth-shattering event is to be a bust: nothing big is to happen to him.  He is to be greeted by nothingness.

That is the state of suspension corporations find themselves in today, as revealed by their annual reports.  Major corporations have been slicing and dicing themselves now for at least 20 years-with little to show for it.  They expect easy times to come a-knockin at their doors, but the grind is relentless, and the outcome is never assured.  They are waiting for greatness, but struggle along in the weeds.

So, in America, their reports on themselves have turned into a bland president’s letter, a badly designed cover, and a chunk of black ink on white paper that comprises the 10Ks they file with the SEC in Washington.  It will probably take a decade before they come to life again.  Like Marcher, the end to their story is rather thin.


1 We give some further hints about the shape of the new corporation in “Free Associaton.”  There is no question in our management consulting practice to which we devote more time.

2 Our own Investment Outlook section has steadily been pointing investors overseas. 

Companies Mentioned in the Report 



Stock Symbol




Berkshire Hathaway



British Land



Emhart Corporation










General Electric



Harvard University



John Deere



Kaplan Education



National Portrait Gallery



New York Times






Pew Charitable Trusts









Time Warner






Wall Street Journal






Washington Post Company



Wolford AG



World Economic Forum



Yale University




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