Terry Bond: Who will pay for those annual reports?

Diary Of A Private Investor: More and more companies are opting for slim-line annual reports. No one, it seems, wants to pick up the costly tab for posting and production
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The Independent Online

It's that time of year when the postman begins to totter. He trudges up the path to my cottage muttering oaths as he tries to stuff a wodge of cumbersome envelopes through the letterbox (I know about the oaths because I'm waiting on the other side of the door to catch the mail before the dog gets it).

It's that time of year when the postman begins to totter. He trudges up the path to my cottage muttering oaths as he tries to stuff a wodge of cumbersome envelopes through the letterbox (I know about the oaths because I'm waiting on the other side of the door to catch the mail before the dog gets it).

The annual report season is in full swing, the pile of brightly coloured information documents is rising, and I am steeling myself to trawl through them in the hope I might discover something I do not already know. Apart from hopes for the future in the statements issued by the chairman and/or chief executive, most of the information is historic and has been publicised beforehand in the press. Nevertheless, even though most of my shares are held in brokers' nominee accounts, I insist on receiving the annual reports. It is my way of getting an overall feel for the company, and the more reports I read the easier it becomes to form a personal impression.

I can't explain the process exactly - it is a combination of various factors and snippets of information, all I know is that when I have ploughed through the pages of an annual report I know whether I am comfortable holding the shares or not.

This whole question of investors receiving the annual document is a hot potato. In the days before nominee accounts and electronic trading it was automatic. If you bought shares you were sent the annual report, presumably by the company via its registrars. Then research showed that most people didn't read the publication anyway, most likely because it was boring, difficult to understand, and full of jargon and PR-speak. Also, the report frequently became an expensive tome to produce and dispatch and if a company had thousands of small investors, a significant expenditure. Not surprising then that an increasing number of companies offered a cut-down version of the report to shareholders who were not particularly interested in the Full Monty.

But the real sea change came with the advent of nominee accounts. Brokers hold their clients' shares in a central account and the individuals' names do not appear on the companies' share registers. And, while the principle that every shareholder is entitled to the annual report is agreed - after all he is in theory a part-owner - the thorny question is: Who pays? Who is going to pick up the tab for mailing this annual document to us investors? The buck is being passed with the speed of light between the companies, the registrars and the stockbrokers. Not us, says the company, it is no longer our responsibility. Nor us, says the registrar, the stockbroker holds the database of names now. We can't afford to pay, argues the stockbroker, gone are the days when we could charge 1.5 per cent of the value of a transaction to our clients. Competition means we have to charge peanuts in commission and there are certainly not enough nuts in the bag to buy stamps for the envelopes.

Meanwhile, my experience is that if you start to rattle the broker's cage and threaten to take your peanuts elsewhere he will arrange for you to receive the annual reports. I did it with a well-know execution-only broker and I now have him well trained. However, as our postman says, every silver lining has a cloud.

* In another life, when I worked for Wimpey and was charged with producing original ideas to sell more timeshare property than our competitors, I had a marketing budget that ran into hundreds of thousands of pounds. Our promotional plans were always littered with outlandish suggestions but fortunately I had a sensible boss, David Holland, who had the power of veto. Whenever I tabled a new thought asking the company to spend thousands, he would say: "If it was your money, would you do it?" That's a real show-stopper.

I was reminded of the lesson when I devised my latest yardstick to measure the strength of a company, and the required information is to be found in the annual report. It is a search that I learned from Kenneth Janke, the wise American who heads the National Association of Investors Corporation.

I look at the shareholdings of each director. I'm not interested in warrants or options or things which might or might not happen some time in the future. I want to know how much ordinary stock they own right now. You will find your answer in the annual report, usually close to the details of directors' remuneration. Multiply the number of shares by today's share price and make a note of the total in the margin beside each name.

What I want to be sure of is that, in the case of each full-time working director, he or she owns an amount of shares which are worth at least as much as his or her annual salary. And in the case of non-executive directors - ie those who turn up once a month for Board meetings and are there preferably for their expertise rather than for their title -I want to see that their shareholding is worth at least as much as their annual director's fee.

Inevitably there will be exceptions. For example directors who have only recently joined the Board and have therefore not had chance to accumulate a strong shareholding. But if a director has been in place for three years or more then this measure is a must if I am going to invest.

Why is it so important? Because when I buy shares in a company I am taking a risk. These directors are representing me on the Board and I want them to be taking a significant risk too. With their own money. It concentrates the mind.

Incidentally, I am told by Ken Janke that there is an increasing tendency in the United States for companies to give their non-executive directors the option to earmark some or even all of their fees for accumulating shares. That shows real faith in the company and it is an idea I would like to see catching on here.


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