in the report of Gulf & Western Industries, where net sales and operating income of 12 operating groups are shown in dollars and percentages. Later in the report, these 12 groups are broken down into 36 product lines. Sales of each of these lines is presented in dollars and also in percentages of total group sales and of total corporate sales. 3. A third basic weakness in some presentations of segmented data on sales and earnings is the failure to reconcile the sum total of the contribution of the segments to those shown on the company's consolidated financial statements. While it is true that an investor with a reasonably sophisticated knowledge of accounting could probably make this reconciliation for himself, not all investors have this ability. Even though few of the reports studied for this survey failed to make this reconciliation, when it was made, it was sometimes difficult to interpret. 4. Finally, as mentioned earlier in this article, one of the most apparent weaknesses in disclosure of segmented information is in the style and tone of the presentation. Weyerhauser, for example, included a full page, seven-color, subdivided surface chart to show the growth in net sales of seven divisions and the corporation as a whole. Impressive as this may be on first glance, one quickly discovers that in order to obtain reasonably accurate estimates of each segment's contribution, would need a draftsman's calipers to measure the width of each band, since each must be read from the band below. No explanatory figures were given separately. Farmland Industries used a similar approach. one Many companies fail to give comparable breakdowns for previous years when they introduce segmented reporting for the first time. While it may be difficult to develop these figures for prior years, it should be remembered that the presentation of only one year's segmented contributions gives little idea of the dynamic perspective of corporate growth. Likewise, many companies 22 FINANCIAL EXECUTIVE August 1971 still appear to search for the smallest type size available to use in presenting segmented information. Or, even if a readable type size is selected, the figures are printed in an ink which does not contrast properly with the paper color. How can an investor be expected to read pink figures printed on orange paper? Or light tan figures printed on dark brown paper? Some personal observations Over the course of the past five years, I have studied some 4,000 to 5,000 corporate annual reports in detail, and perhaps I may be allowed to conclude this fifth survey with some personal comments on the general state of the art of reporting to share owners. In general, the art has degenerated into a lifeless and imitative copying of (1) what was done last year; (2) what the competition is doing; and (3) what new things are being required, whether by the SEC or by the Accounting Principles Board. What is specifically missing from the art today is any feeling that reporting to shareowners is something other than a routine and distasteful duty that has to be done each year. One is overwhelmed by a meaningless clutter of unrelated and irrelevant trivia which has little bearing on the basic purpose of an annual report-to give present and potential investors the information they need in order to make investment decisions. Although reporting requirements today are such that much of this information must be included, one has to wade through a welter of public relations nonsense in order to extract essential information bit by bit. To be sure, there are endless photos of highly technical new products and processes; there are numerous photos of new warehouse and distribution facilities (which from the photos appear to be completely interchangeable among companies); this year there are token photos of black employees judiciously placed for maximum attention; and, 1970's leading item-the obligatory and empty discussion of ecological and environmental problems. Management seems to have forgotten that its first obligation to investors is to tell them what the company is, what it is trying to do, what it has accomplished, and where it has failed. This is the excitement of business, and this is what is missing from most annual reports. Too often the tone of the report is static, defensive, and self-inflating rather than dynamic. One wonders if perhaps the main reason for the sagging quality of annual reports is the lack of involvement of the financial executive in the entire annual report. In many companies today, his involvement stops with the financial sections and with a cursory review of the president's letter. If the purpose of the report to shareowners is to translate the company's activities for the past year into financial terms, shouldn't the financial management of the company assume the responsibility for designing, writing, and producing the report, rather than leaving it to the public relations and advertising departments, the secretary's office, or some miscellaneous corporate group? Isn't the financial executive in the best position to analyze the company in the manner which would allow it to put its best foot forward for present and potential investors? Isn't the real purpose of the report to present this financial information to investors? Shouldn't the heart of the report the financial sections-govern the design and production of the rest of the report, rather than vice versa? Isn't it time the financial executive again assumed the full responsibility for what is essentially his job? GH D. EXCERPTS FROM DIVISIONAL PERFORMANCE: MEASUREMENT AND CONTROL, BY DAVID SOLOMONS DIVISIONAL PERFORMANCE measurement and control DAVID SOLOMONS Professor of Accounting Wharton School of Finance and Commerce RICHARD D. IRWIN, INC., Homewood, Illinois IRWIN-DORSEY LIMITED, Nobleton, Ontario 1965 by Financial Executives Research Foundation, Inc. All rights reserved. No part of this book may be reproduced in any form without prior written permission This edition published by arrangement with the Library of Congress Catalog Card No. 65-28460 Printed in the United States of America Preface The organizational structure of a corporation is the result of many factors. As sales volume grows, and as product lines diversify, the divisionalized form of organization becomes a logical one for many corporations. But progress inevitably brings problems (just as the resolution of problems brings progress) and the change from a oneunit operation to a multiunit operation means that management must operate under difficult ground rules. The reporting of performance of divisions, and the rating of a division manager and their assistants based on division earnings, created a situation in which a conflict of interest arose. A general manager might make a decision which benefited his division's earnings and his personal compensation but which might not be the best decision from the company viewpoint. Moreover, division managers objected to the reduction of their earnings through accounting practices which were designed to reduce the payment of taxes in the current year, by reason of increased depreciation or other charges which reduced book earnings. As a result of this tax accounting, cash flow would be increased but the net income on which performance was based would be decreased. Then other decisions affecting relations between divisions might increase earnings of one division at the expense of another division and perhaps also the company. These questions needed investigation and research to suggest acceptable solutions. In view of the importance of the divisionalized corporate structure, the Trustees of the Research Foundation decided, in 1961, that there was need for a definitive study concerned with the accounting control of decentralized business operations. Such operations would include not only those which are geographically separate from the controlling center (distant plants, branch offices, etc.) but also those separated from the controlling center organizationally rather than geographically (e.g., autonomous divisions, subsidiary companies, and service establishments). Such a study was not intended to be a mere empirical recital of current practices but, rather, an eclectic view in which the researcher's views would have equal weight with the best practices observed. It was likely that in some areas there probably would be no practices which adequately and satisfactorily dealt with the questions involved. In this way the Trustees felt the report of the researcher would truly enable the reader to gain insights into ways of measuring and controlling divisional performance. To Professor Solomons, for his research and for his original thinking, and to the members of the Steering Committee and the Review Panel listed on page x of this book, the Trustees of the Research Foundation gratefully acknowledge their appreciation for the combined constructive effort which has developed in this area. Dudley E. Browne, President Financial Executives Research Foundation 1965-1966 |