The corporate annual report, a widely ignored document, could do with a makeover. It is generally devoid of transparency, candor, and life. Most companies seem to regard it as a chore. In recent years, these reports have been reduced in size. Many companies now greet shareholders with a bland statement placed in front of the 10-K report they file with the Securities and Exchange Commission. Talk about tough reading.
If you want to see just how big a missed opportunity this is, take a look at the annual reports of the Swiss pharmaceutical giant Novartis AG. The company sets a new standard for delivery of information in clear, nuanced, and felicitous prose. This year’s version, which you can see at www.novartis.com/annualreport2009, runs to 264 pages, is published in English, French, and German, and is adorned with 33 striking black-and-white photographs shot by Magnum Photos photographer Steve McCurry. Each year Novartis commissions a photographer to contribute his or her perspective on health care. McCurry’s photos come from 10 countries.
The Novartis report combines well-organized financial statements with citations of corporate citizenship and governance practices. The writing is lean, beginning with the mission statement, expressed in two sentences:
We want to discover, develop and successfully market innovative products to prevent and cure diseases, to ease suffering and to enhance the quality of life.
We also want to provide a shareholder return that reflects outstanding performance and to adequately reward those who invest ideas and work in our company.
The devil being in the details, here are some things that Novartis communicates in its annual report:
The board is independent. Only one board member, CEO Daniel Vasella, currently works at Novartis. Others include the former chairman of Porsche (Wendelin Wiedeking) and the senior associate dean at Harvard Business School (Srikant Datar). The 12-person board of directors includes two women, an African-American and former CEO of Young & Rubicam Brands (Ann Fudge) and a Chinese entrepreneur (Marjorie Mun Tak Yang). Novartis underlines the diverse composition of its board as “a critical success factor for its work.”
There is a commitment to transparency in compensation practices. The report details the compensation of top executives, which is now heavily weighted toward equity awards instead of cash. Vasella received 83.8 percent of his 2009 total compensation (CHF20,471,929, or US$19.1 million) in shares. Originally, stock options were limited to 400 key executives. Now they go to 11,000 employees, or 11 percent of full-time staff. Further, employment contracts contain a “clawback” provision enabling Novartis to “reclaim bonuses if it later emerges that the bonuses were paid out based on false information or dishonest management.”
Novartis cares about its employees. In 2005, the company pledged to pay employees a living wage in every country where it operates. Last year, for the first time, no upward revisions in pay were required to meet this pledge. The lost-time injury and illness rate at Novartis facilities has been halved in past three years, to 222 incidents per 200,000 hours worked.
The company’s transparency extends to embarrassing information. For instance, in 2009 Novartis received 913 reports of misconduct, up from the 884 reported in 2008. Of these reports, 240 were substantiated; 155 employees were fired for misconduct.
Sandoz, the generics division of Novartis, was faulted in 2008 by the Food and Drug Administration for improper practices at its plant in Wilson, N.C., resulting in a halt in new product approvals from that site. In response, the company voluntarily recalled a number of products and revised procedures to the FDA’s satisfaction. Jeff George, head of Sandoz, replaced the top management at Sandoz–United States, as well as the management team at the North Carolina factory.