Report card: When CEOs dream in annual reports

By David McEwen

Friday 24th May 2002

Good chief executives communicate their vision for the company. They also tend to have a detailed strategy and are bursting with excitement at the prospect of generating increased wealth for shareholders.

Sadly, many fail to reveal these attributes in annual reports.

Some can't because they are seat warmers who don't have a compelling vision or strategy. Most take the position that information about how, where and when they intend to make money is so important that it must be kept a secret. Sorry, but even the company's owners don't need to know.

The word vision is rarely used in annual reports these days, probably because it was so abused in the 1990s when "vision statements" were popular.

These cliché-ridden, committee-written pieces of puffery rarely did what they were supposed to - explain what the company does, stands for and wants to achieve.

One managing director who isn't embarrassed to use the word is Gavin Aleksich, the new head of retirement homes and healthcare company Metlifecare.

"To be an industry leader you need vision. An industry leader then needs to take its vision to the market and turn it into a compelling reality for its customers. A platform for realising Metlifecare's vision for the future was firmly established in 2001, with improved operational and financial results," he says in the company's latest annual report.

Some were aghast when he was appointed in late 2001. What was a listed company doing appointing as chief executive a nurse-turned-MBA-qualified-consultant? Obviously nobody else wanted the job, malicious tongues wagged.

Based on nothing more than his review in Metlifecare's latest annual report, the naysayers got it wrong.

His report has many appealing qualities that other, more beautifully sculptured reports lack. Elements include clear objectives for improving shareholder wealth, a pithy description of the company and the sectors in which it operates, the challenges and opportunities it faces and its preferred destination.

He communicates a sense of excitement and commitment that more old-school managers seem to lack. People with shop-floor experience often make superior managers because they have an instinctive understanding of their industry.

By comparison, chairman Peter Fitzsimmons' review has a dry, by-the-numbers feel.

At the business end of the report, the company helpfully shows all its annual results since it listed in 1995.

At first glance, the numbers look good. Over the past seven years, the company's revenues have more than tripled from $26 million to $82 million. Shareholders' equity has grown from $32 million out of total assets of $69 million (equity ratio of 46%) to $94 million out of $166 million (57%) - assisted by a $21 million rights issue. Net operating cash flow has risen from $4 million to $22 million.

Impressive as these numbers are, they don't show what a rocky road the company has been on over the years. After four years of profit growth, the company had a terrible 1999 followed by a worse 2000, when it barely broke even.

Return on shareholders' funds started at 1.8% in 1995 and grew to a reasonable 12.8% in 1998 but slipped back to 0.7% in 2000.

Even after an impressive turnaround last year, when net profit rose from $0.5 million to $7.2 million, shareholders are still getting a frankly inadequate 7.4%.

Notes to the accounts show inventory value has increased to $14 million from $12 million. This is less impressive than the figures the company chooses to show as a highlight at the front of the report. That reads: "End of year inventory of villas and apartments reduced to 74 (5.0% of total stock) from 116 (8.1% of total stock) in 2000."

Accounting changes that boost the bottom line don't get a mention in the front half of the book. New standards relating to the classifications of property as fixed assets or investments, plus a "refinement" of the method used for calculating the cost of sales of occupation licences, resulted in a net benefit of more than $1 million.

These elements won't be available in the current financial year, which means Mr Aleksich must come closer to achieving his vision to improve shareholder returns.

David McEwen is an investment adviser and author of weekly sharemarket newsletter McEwen's Investment Report. Web: www.mcewen.co.nz; Email: davidm@mcewen.co.nz

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