Examining U.S. and Spanish Annual Reports

Annual Reports and Chairman’s Statements

Many researchers have recently focused on annual reports from both a pedagogical and a professional point of view (Abraham & Cox, 2007;Camfferman & Cooke, 2002;Linsley & Shrives, 2006;Lord, 2002;Yuthas, Rogers, & Dillard, 2002). The first important reason to use this type of text is the relevance that it may have for students and professionals. Since it is a real text, created by corporations in order to offer specific data from their yearly operations, this type of information is appreciated by both firms and investors.Pfeffer (1981)pointed out this fact, stating that the task of management when offering data to customers and shareholders is “to provide explanations, rationalizations, and legitimation for the activities undertaken in the organization” (p. 4). For instance, when corporate annual reports offer causes on the specific performance of companies during an economic period, the type of text these firms offer has some aspects that tend to help to depict a general layout (seeBettman & Weitz, 1983, on the use of causal reasoning within annual reports, orBeattie, McInnes, & Fearnley, 2004, on the need to study corporate reports and establish a methodology to analyze and evaluate narratives within these texts).

A second important aspect we should be well aware of is the availability of annual reports, as these texts can be obtained fairly easily. These documents are often downloadable from the Internet, although they can also be sent in traditionally printed format. Finally, it is always beneficial to find a document that depicts some kind of heterogeneity in the sections included; despite an existing taxonomy, on which we will comment later, there are specific elements in most annual reports that convey a particular appearance. In short, annual reports are similar and, at the same time, they show some personal elements that make them fairly personal texts (Palmer-Silveira, 2009). Additionally, annual reports are interesting texts to analyze, as their authors have to be frank and offer true facts and figures, something that has been seen as a basic aspect of this type of texts for many years; yet annual reports must also adopt a consumer focus, meeting the information needs of investors and creditors in such a way that could embrace a “broader, integrated range of information” (American Institute of Certified Public Accountants, 1994, p. 131). (SeeLentz & Tschirgi, 1963, on the ethical content of the annual reports; something also observed byStanton & Stanton, 2002.)

Within annual reports, we have focused on the opening section of these documents, often defined as Chairman’s Statement (Hyland, 1998;Ruiz-Garrido, Fortanet-Gómez, & Palmer-Silveira, 2010). The reasons to use it for our teaching purposes are threefold. Initially, we should notice that this statement may be the first contact with the firm for any reader, so it can be assumed that it will create a first impression for that person. It tends to convey positive messages for investors, and the use of language is both simple and direct. It may be important to point out that in many cases, to show that direct contact with the reader, we could be observing the general structure of a formal letter (de Groot, 2008;Nickerson & de Groot, 2005).

The second concept we should be aware of is that these documents are often a thorough account of the actual situation of the firm, in a summarized way, so the author has to be sure of the accuracy of the items and ideas that she or he decides to share with her or his readers. This implies that this type of document is used as an introduction to the complete annual report, offering an abridged version of most of the information that will later appear in the complete text. In any case, while other sections are often more complete, we should not forget that this statement is shorter and that the author chooses what to include and what to omit, so we are dealing with a partial image of the actual situation of the company and not with a complete picture of it (Al-Razeen & Karbhari, 2004;Samuels, 1993).

Finally, it also tends to include, in its final part, an analysis of the possible future of the company, opening new ways to understand all the steps taken by the company in order to achieve future objectives. In any case, we cannot lose perspective as this forecast is biased by the fact that it is written by an interested party; it should be further analyzed by comparing it with the actual data appearing in successive sections of the annual report, especially those devoted to the company’s future prospects (Holmes & Sugden, 1989;Skulstad, 2002).

Thus, the Chairman’s Statement can be defined as a genre often used by companies to persuade stockholders to trust them.Foz Gil & Vázquez Orta (1995)observed this purpose and classified this section of the annual report in terms of the “communicative intentions serving the overall rhetorical purpose of persuading their readers” (p. 88). Together with the general informative purpose that can be understood in corporate communication, Chairman’s Statements offer that pragmatic focus on convincing readers of all the positivism implied by the firm. That pragmatic focus will probably be enhanced, even when companies face a turndown situation in international markets, and this is something that, in our opinion, deserves further attention.

Crisis, What Crisis?

People interested in business enjoy reading real information about companies in order to get as much information as possible about them; however, the harsh times that most Western companies have had to endure recently have forced people to read between the lines, trying to determine if the positive message that Chairman’s Statements tend to offer has somehow been altered by the actual economic situation of companies. As we pointed out above, examples of Chairman’s Statements evidence a combination of information and promotion that clarifies terms and conveys a sense of truthfulness in the document. Needless to say, many readers assume that any text offered by a company has a segment of promotional aspects that make it easier to read (Jordan, 1986). Considering this fact, Chairman’s Statements are devised to be read by many people, becoming valid examples of simple, professional language.

However, after the 2007 crisis, many readers started to assume that things were not as positive as they seemed. All of a sudden, many people started to wonder if chairmen were frank when stating facts in the initial section of their annual reports. For example, they wondered, was it wise to state the truth, when it could jeopardize their company’s interests? As educators, we wondered if there have been changes in the way these texts are written, due to the negative impact of the crisis. To do so, we analyzed three different parameters:

Several years ago,Smith and Taffler (2000)observed how chairmen offered bad news in their statements, comparing the way these texts were written subsequent to corporate failure. They observed that “both a combination of keywords and underlying themes present in the chairman’s statement permit a high degree of discrimination in the classification of bankrupt and financially healthy firms” (Smith & Taffler, 2000, p. 639). Once again, and in order to understand this analysis, we have to agree that annual reports depict a combination of informative and promotional language (Palmer-Silveira, 2009;Ruiz & Saorín, 2009), a fact that we should be well aware of when dealing with Chairman’s Statements presented during the current economic crisis. In many genres, this difference is not clear-cut (seeMaat, 2007, on press releases), although in other cases, such as ours, it is up to the writer to choose which aspect deserves his or her consideration at a higher level.Bowker and Pearson (2002)pointed out that “the types of texts that you include in your corpus will depend on what you wish to study” (p. 51). Keeping this in mind, if we want to understand the real impact of the crisis for many firms, it will be important to analyze the actual texts specifically created by the companies to share their views on the effect of the economic turmoil on the firm with their prospective readership. In analyzing these texts, we assumed that the impact of the crisis would have to be commented upon in the Chairman’s Statements and we devoted a higher level of analysis to these sections of the annual reports.

We assumed, due to the combination of information and promotion that these texts convey, that chairmen would be very cautious when referring to the crisis. Nobody would like to invest his or her money in a company without any positive future. Thus, we had to assume that the authors would have to combine negativity (the current trends imposed by a slumping international market) with positivism (the different possibilities that the company has devised to overcome this current tendency). So, we supposed that there would be some important changes in the way authors would use language, due to the difficulties implied by this dichotomy. It was relevant to analyze how they could offer a real image of fairly negative times somehow disguised in a positive coating. This negative impact of the crisis could also alter the way their corporate image could be transmitted to prospective investors.

Our hypothesis implied that, despite the bad economic situation for the global economy during the 2007-2008 period, Chairman’s Statements would maintain a positive tone, trying to disregard, as far as possible, any possible negativity that the overall message conveyed. We assumed that the promotional aspects of the annual report would be increased in order to minimize the impact of any flaws observed while pointing out the actual information about the firm’s financial liability. In other words, we believed that the promotional features of the annual report would be more relevant than its informative contents.

In order to validate our hypothesis we compiled a corpus based on international Chairman’s Statements, trying to observe how this crisis has altered the way international companies present their results in a way that maintains that aura of positivism we mentioned above, despite facing considerably harsh times. It is important to note that many international companies use English (English having become the international language of business) in order to present their annual reports (Babcock & Du-Babcock, 2001;Crystal, 1997;Czinkota, Ronkainen, & Moffett, 2009;Kameda, 1996). Nevertheless, for our research purposes, our decision was to compare similar texts written in Spanish and English, as we assumed that authors would feel higher freedom to express themselves if writing the document in their own language.

Method

To analyze the way these texts conveyed a “difficult message” to any prospective reader, we compiled a corpus of Chairman’s Statements, all of them taken from the years 2007 and 2008. The reason for choosing these years was based on the fact that the 2007 Annual Report would probably be considered the last one written without necessarily facing the global effects of the crisis (even though it had started during that summer internationally), whereas the 2008 Annual Report had to point out those effects to their readership.

In order to compare the way the crisis affected U.S. and Spanish firms, we decided to compare the Chairman’s Statements of those annual reports published by 25 Spanish companies, all of them written in Spanish, and 25 U.S. companies during the same period of time (years 2007 and 2008), in this case all written in English. Based on this corpus, and for this initial piece of research, we focused our current analysis on a smaller subcorpus, choosing 10 Spanish and 10 U.S. companies that can be defined as highly important within their own stock exchange markets. The relevance of the 20 companies that we used to make up our analysis can be observed inAppendix A. The U.S. companies are all listed in the Dow Jones Industrial Average, whereas the Spanish ones have been taken from the IBEX-35, which is the benchmark index of the Madrid Stock Exchange market. The decision to choose these 20 companies to form our corpus was based on this decision: We agreed to analyze the first 10 companies listed in the Dow Jones Industrial Average list (where there are 30 in all) and the 10 first from the IBEX-35 (where there are 35). Unfortunately, there was one Spanish firm (Arcelor Mittal) that was disregarded for this analysis, as it publishes all the information in English, and it was our interest to see how chairmen used their own language to depict information. An initial analysis and previous studies on how business people communicate information throughout these documents (Palmer-Silveira, 2009) have already proved that most annual reports are similar in their structure and organization of ideas, so these aspects have not been taken into account in our study.

Our study is mainly qualitative although some quantitative results are also shown. To analyze the texts quantitatively we converted all the documents to .txt files, disregarding the pieces of texts accompanying graphical information (bar charts, figures, tables, photographs, and other images that tend to be used in these sections), although we have kept those visual elements in attached folders for a future study. We used WordSmith Tools 5.0 for our linguistic analysis.

Results and Discussion

To analyze the way these texts are written and how they might have changed in recent times, we tried to answer the initial question we stated above: Has the current economic situation had an effect in the way these texts are written? And, if so, up to which degree? In our initial hypothesis, we assumed that chairmen would try to offer a positive image in bad times, trying to minimize any negative impact that the crisis might have caused in their firms’ annual results. However, data seemed to suggest a fairly different result. Paying attention to the texts that we used in this corpus, we noticed a slight change in the specific audience. Up to 2007, these texts were clearly written for a much broader audience, for anyone interested in the company (stakeholders, customers, press, or even the general public). However, there was a sudden change in the 2008 set of annual reports, where we noticed that the target audience is clearly narrower. During these harsh times, Chairman’s Statements seem more specifically written for stakeholders, for those readers who have already invested their assets in a given firm and who want to get as much information about the company as possible. Needless to say, and considering that the texts are written for a fairly narrow audience, authors can focus on their form and contents more accurately, conveying a different message to the one they used to offer in previous years.

Thus, if texts were clearly written for actual stockholders, we have to assume that this audience is more interested in information than in promotion, changing the way the texts were written—something that made us think that we were wrong in our initial hypothesis. In fact, the chairmen seemed quite frank in assuming the negative impact that the crisis has been causing to their firms; they did not seem to hide problems or negative data, as we had expected while stating our initial hypothesis. They basically minimized the effect of promotional language, giving a greater relevance to the information needed by investors. Thus, we can conclude that the chairmen really understood that, in harsh times, the informative side of the Annual Report is more important than its promotional aspects. To make a long story short, informative language took the lead during a time of financial crisis.

Apparently there were important changes in the way these texts are written, but we do not know up to what degree. If the purpose of the Chairman’s Statement became different, it could be that the writers, not being used to focusing on the negative aspects of the information, might write longer texts to justify opinions and performance. We thought that 2008 texts would be longer, as the chairmen had to explain the crisis in detail. We analyzed if there were any major differences in the overall length of the Chairman’s Statements included in our corpus. Results proved that, despite their contents, the average length of this type of document was similar both when involving U.S. or Spanish texts. So, whereas the U.S. Chairman’s Statements written in 2007 had an average length of 2,363.8 words, that figure was quite similar in 2008, with an average length of 2,303.6 words, just merely 60 words (2.55%) shorter than the previous year’s texts. Similarly, these results were also observed when comparing the data analyzed in the Chairman’s Statements published by Spanish firms. In fact, the texts depicting the 2007 results had an average length of 1,526.4 words, whereas the statements published 1 year later had almost exactly the same amount of words, with an average length of 1,526.9 words.

The data indicated that language devoted to implying how the crisis affected the company appeared in the more recent (2008) Chairmen Statements, and that the volume of text used to promote the firm obviously diminished in 2008. That initial analysis prompted us to state that, so far, we noticed that the texts had a similar length but depicted different objectives. If we assume that the texts analyzed had to deal with the crisis, how did authors manage to do so? The first important image that we observed was that, among those Chairman’s Statements analyzed that depict any reference to the global crisis, there were two possibilities or two major ways to handle the topic. On the one hand, we saw many general descriptions of how the crisis affected the economic situation of the country in general, or the company in particular. This tended to be depicted in more than just one paragraph, and chairmen described those “harsh times” as something we all have to deal with. In most cases, we found explanations that offered general data that many readers would probably have been aware of beforehand. Much more relevant for our analysis was a second type of reference to the crisis: In some cases, chairmen offered specific information on how the crisis had forced the company to take new measures, pointing out the necessary steps taken to overcome the troublesome situation they are facing. In these cases, some paragraphs were devoted to an explanation of some specific changes within the company’s executive lineup or related to its general structure, which might have undergone some modifications in recent times.

The international crisis, therefore, appears in these texts. It is a fact that no company was able to deny. Thus, a second question arises: How do firms cope with the new situation? Initially we assumed that many companies might have denied any effect of the crisis in their 2007 Annual Reports, while it was already a fact hard to hide 1 year later. Data proved this hypothesis, as the recognition of the crisis was clearly higher in the 2008 texts. Numerically, four firms did not pay attention to the crisis in their 2007 statements (three were U.S. texts, whereas there was just one example among the Spanish texts). However, in 2008, all companies referred to the crisis, regardless of the country of origin of the annual reports. The percentage of text devoted to this topic was higher in both cases, as we will see later. Apart from other topics mentioned in this type of texts, data showed that, in 2007, U.S. companies devoted an 8.1% of their Chairman’s Statements to the topic of the economic crisis. It would be important to point out that, among the 10 firms analyzed, only 3 firms offered information on the topic exceeding 10% of the total amount of text used.

What was surprising, in our opinion, was that, also in the 2007 texts, Spanish companies devoted 21.2% of the total length of their Chairman’s Statements to the crisis, a figure clearly higher than that observed among their U.S. counterparts. Similarly, 7 Spanish companies devoted well more than 10% of their texts to this topic. This data suggested that Spain had either suffered a higher distress caused by the economic slump or, at least, that the companies had been more willing to accept those hard times more quickly than their U.S. counterparts. It was important to see if these data were similar 1 year later, once the crisis was hard to deny all over the world, or if there was still a difference in the slant of Spanish and U.S. chairmen while offering information on the crisis within their introductory statements.

The data collected from the 2008 Chairman’s Statements showed that U.S. companies devoted a 26.7 % of their Chairman’s Statements to the topic of the economic crisis, a considerable increase from 2007. Similarly, among the 10 firms analyzed in this initial study, 8 firms offered information on the topic exceeding 10% of the total amount of text, and 6 firms went well more than 25% of the text.

These data revealed that 2008 was a bad year for the U.S. firms, as many chairmen recognized in their statements. However, it was even worse in Spain. Once again, the figure calculated when analyzing the Spanish firms was clearly higher than among their U.S. counterparts. In 2008, Spanish chairmen devoted 41.9% of their statements to the topic of the global crisis. What was even more shocking was the data showing that all companies devoted over 25% to this topic, no matter the industry they dealt with. Results seemed to suggest that the crisis, despite being a global fact, hit some countries really hard, among which we can include Spain; or, to state it more clearly, these results implied that U.S. firms were quite concerned about the negative aspects of the crisis, whereas their Spanish counterparts were just terrified.

The analysis of the annual reports and chairman’s statements pointed to information that can be quite relevant to understand the origin of this global crisis: Banks might have known what was going to happen well in advance. Based on the percentage of information appearing in the 2007 Chairman’s Statements, Banco Popular offered a good bulk of information on the crisis, equaling a 40.1% of the total length of the text, something similar to one of its main rivals in the Spanish banking market, Banco de Sabadell, whose comments on this coming economic plunge equaled 38.4% of the total length of the chairman’s statement. Similarly, and related to their U.S. counterparts, was Bank of America, the company which offered a greater bulk of information on the crisis (25.1%), well above the rest of the U.S. Chairman’s Statements. Needless to say, banks had information in advance, knew about trends and tendencies in the trade market, and were sure of the importance of the coming crisis earlier than other industries, both in the United States and in Spain.

Based on these data, we can wonder if the chairmen were really involved in the crisis, if they really thought that it could have a direct effect on the company’s performance, and, what is more relevant for our purposes, if the language used helped us to detect that they were somehow worried about future results. We should state that, after analyzing the statements that form our corpus, we agreed on that idea. Chairmen often used the first-person singular when dealing with their own views about the crisis. Nevertheless, they often mixed that with a further usage of the first person plural or even the third person singular (implying the firm itself) in order to establish their ideas. We concluded that they seemed to show some kind of mixed emotions on the topic, implying a mixture of “detachment” with “commitment” in order to express their feelings and ideas on what was about to come in the future.

Language, therefore, adds further relevance to understand the way these texts were written. Since it can be easily understood, authors avoided the use of the wordcrisisin their Chairman’s statements. In fact, there are other terms that were often substituted in order to avoid the term crisis, such aseconomic slowdown(or its Spanish counterpart,desaceleración económica),difficulties(alsodificultadesin the Spanish texts),challengesorslowdowns. These lexical items were used very often, but we also found some semantic sequences that were also used in many instances, such as “difficult year,” “international financial/economic instability,” “changing economic cycles,” “times like these,” or “a very challenging economic environment.”

Paying further attention to lexical bundles, we detected the use of metaphors and “boosters.” This later option is often used to intensify some negative aspects already implied by the words chosen. Some metaphors observed while analyzing our corpus were “plaga financiera” (in English, “financial plague”), “el virus de las hipotecas subprime” (in English, “the virus of subprime mortgages”), “Alcoa will weather this ‘Perfect Storm’ and emerge even stronger” or, what we considered as a fairly worrying example, “reengineering program” (implying the decision to eliminate 7,000 jobs). In any case, there were several lexical bundles used in order to avoid the direct expression of the term crisis, both in Spanish and English.

We also found an important use of quotes, trying to offer some positive view on these negative times. It seemed as if using someone else’s voice was a good idea to convey a bad message with some kind of “professionalism” and mitigate its negativity. There were two examples we would like to point out. The first one was used in 2008 by the Chairman of 3M, quoting George Bernard Shaw’s statement: “As Bernard Shaw said, ‘the best way to predict the future is to create it.’” Nevertheless, this was not just used by U.S. corporations. Spanish chairmen also used this, as shown in the following quotation, taken from the 2008 Chairman’s Statement issued by Banco Popular:

The word “crisis” when written in Chinese consists of two characters: one represents danger, the other represents opportunity. . . . In a crisis, be aware of the danger but recognise the opportunity. John Fitzgerald Kennedy (Banco Popular, 2008, p. 8) [original source in Spanish]

Conclusion

Despite the fact that the structure and organization of the Chairman’s Statements analyzed are fairly similar (as commented above), the information appearing within is reasonably different, probably due to one initial feature that we should take into consideration: In hard times, when the companies face some problems in order to succeed, Annual Reports are merely stakeholder oriented, trying to offer as much information as possible to this target audience. As a result of this, we can state that the informative purpose of these texts is clearly more relevant for their authors than the attempt to use them from a promotional perspective. When the crisis strikes hard, there seems to be an attempt to reassure actual stockholders, and these documents are proof of this trend.

This was an obvious fact in the 2008 reports, something that was not so clear, in general, during the prior business year. In fact, we can argue that authors tried to avoid the topic at an initial stage, pointing out other facts and figures of relevance. However, just 1 year later, most companies acknowledged the harsh times and offered their views on the crisis. That sudden change that can be seen between the results of the two business years analyzed (2007 and 2008) offered some additional data that we can also point out, deserving further analysis. For instance, Spanish companies seemed much more concerned about the crisis than their U.S. counterparts. We hypothesize that, in its origin, this crisis had worse effects among a population with an unemployment rate well more than 20% (Spain) than for an initially stronger economy, showing an unemployment rate of less than 10% (United States). In any case, and also deserving further consideration, we also note that banks in both countries seemed to be more concerned about this situation than other types of companies, according to our results.

Paying attention to the Chairman’s style while writing these texts, we observed that there is a mixture of “commitment” and “detachment.” Authors tried to show they care for their readers while, at the same time, they positioned themselves as mere storytellers of the difficult times they depict in their texts. They were not to blame or, at least, that is what they want their readers to understand. Additionally, they use a wide number of linguistic resources to avoid the “damned” word, such as synonyms, semantic sequences, or metaphors. Anything is valid as long as they could offer a positive image in such hard times. For instance, authors often used quotes, taken from varied sources, in order to implement the positive tone of the message sent out.

Finally, and regarding our teaching activity, there are a number of purposes in using annual reports and chairman’s statements to teach or improve students’ writing. For instance, students can analyze the use of positive language to mitigate negative messages, something that can be observed not only in Chairman’s Statements but also in other types of business-related documents. Similarly, texts can also be used to implement our students’ knowledge of the differences that can be observed between informative language and promotional language. Additionally, we can implement detailed studies about how some linguistic resources can be used to avoid some specific words, through the use of synonyms, semantic sequences, or metaphors, as authors do in the texts analyzed. Finally, it can be very useful to use our corpus and/or research to teach students how to deal with these kinds of issues in both languages, English and Spanish, giving a contrasting view of the crisis topic. An example of an activity implemented in a postgraduate course can be seen inAppendix B.