As an international business attorney, I read my fair share of annual reports– both domestic and foreign. While the amount of information disclosed in the reports varies widely depending on the industry and country, most reports fall on the far left of the transparency continuum i.e. on the fringe of what the law requires.
There is no better illustration of the sharp contrast that exists among annual report disclosures than the distinct approaches taken by Goldman Sachs, the beleaguered Wall Street firm and Swiss pharmaceutical giant Novartis AG.
Goldman Sachs Annual Report.
In the opening salvo of its annual report, Goldman is downright indignant and asserts that its only role in the financial markets has been positive.
To deflect attention away from Wall Street matters, Goldman went to great lengths to say that it spent the year acting in the interests of its clients and that these actions were the driving force behind its business.
That fails to address the huge sums of money that Goldman made in proprietary trading that did nothing to benefit clients, but enriched Goldman’s shareholders and employees. The investment bank pressed the case that it paid workers only for their performances and nothing more.
Did you catch it? There, on page 39, is Goldman’s disclosure in all its vague, generalized and broad-brush glory:
Substantial legal liability or a significant regulatory action against us, or adverse publicity, governmental scrutiny or legal and enforcement proceedings regardless of the ultimate outcome, could have material adverse financial effects, cause significant reputational harm to us or adversely impact the morale and performance of our employees, which in turn could seriously harm our businesses and results of operations. We face significant legal risks in our businesses, and the volume of claims and amount of damages and penalties claimed in litigation and regulatory proceedings against financial institutions remain high. Our experiencehas been that legal claims by customers and clients increasein a market downturn and that employment-related claims increase in periods when we have reduced the total number of employees
Specific references to open Investigations, lawsuits, administrative actions? Move along. Nothing to see here.
Novartis AG’s Annual Report.
Contrast Goldman Sachs’ smoke-and-mirrors approach, with the refreshingly transparent direction taken by Novartis’ 2009 Annual Report. Milton Moskowitz of Strategy + Business published a fascinating article extolling the virtues of Swiss-style annual reporting as seen through the lens of Novartis’ Report.
As Moskowitz noted, the transparent nature of the Novartis report “sets a new standard for delivery of information in clear, nuanced, and felicitous prose. “ The Report, published in English, French, and German, is adorned with 33 striking black-and-white photographs shot by famed photographer Steve McCurry.
While that baby picture makes for a great cover photo , the hallmark of the Novartis Report is its commitment to transparency, which extends to some embarrassing information. For example, 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.
In addition, 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.
Although this isn’t the kind of information an investor would like to read in an annual report, it makes for good decision making. Investors appreciate that.
Novartis’ commitment to openness and transparency benefits shareholders, securities analysts, and the general public by presenting a warts-and-all picture of the workings of the company. It reinforces the integrity of the markets and sets a high bar for others to follow.
Goldman Sach’s Annual Report, on the other hand? All smoke and mirrors.