To: Investors – Re: Company annual reports

What do you do with company annual reports?

If you own stock, you have probably received an annual report or two from your broker in the past month (it comes in the dark blue plastic bag with that board of directors ballot you probably never fill out). If you own a lot of stock – Forbes 400-style – you’ve probably gotten a small forest worth of annual reports (and you probably do fill out that ballot for a few companies). The default rule at most brokers is to send an annual report by mail, but this seems like a policy that might be ripe for change.

Shifting the default rule to sending annual reports via the web is one reasonable option. Several years ago, the government expanded the notion of “delivery” to include this option, but it is not the default, either for companies or for brokerage houses. Most customers also already have the option of selecting electronic statements, but annual, and semi-annual, reports, which are much larger and usually printed on heavy color paper, pose a greater environmental threat and impose higher expenses on the organizations that mail them.

If anything, mailing statements and e-mailing electronic annual reports makes more sense. For the average investor, reading a monthly or quarterly statement is more important than reading an annual report. It’s usually easier to understand, which means more of the information on it will be absorbed, and it provides the information (like asset allocation) that is most important to an investor’s overall strategy. The standard investment advice is to read a company’s annual report before – and after – investing, but if you are the average long-term investor who meets with his broker once a year and treats the broker’s advice like a heuristic for what to buy and sell, you will probably survive. (And you will be in good company.)

The default rule need not be a simple one-size fits all rule for every investor. Companies could design a default mix of mailing and electronic reports based on studies of customer behavior and preferences. Maybe those on the Forbes 500 read their annual reports (or at least hire another set of eyes besides their broker’s to do so). Maybe certain categories of investors read annual reports for companies in certain industries, but not others. The point is that designing targeted annual report mailings is an empirical question, not a theoretical one.

Finally, there is also the possibility that paper reports aren’t the best way for investors to follow companies or funds in their portfolios. Annual reports contain information about the past. Stock prices trade based on the future. Perhaps investors should trust their ears more. Listening to live quarterly conference calls and asking questions is a regular part of a Wall Street analyst’s job. It is often a place where analysts learn a great deal about what is most important for the stock – namely, a company’s short- and long-term prospects. But analysts aren’t the only people who benefit from listening to company executives talk. With a few rounds of practice, casual investors can get a handle on a company’s health through verbal cues, by following the questions of the human, but more sophisticated, analysts, and, of course, by listening carefully to the company’s opening statement. Another default rule option, then, might be to send mp3 files of quarterly conference calls to an inbox along with an electronic copy of the annual report. In the age of paper, maybe better choice architecture will nudge us toward using more of our senses when handling our money.


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