Editor’s note: First of a three-part series.

A bit of introduction is required before launching into this inside look at corporate annual reports.

International consultant William Dunk’s review of these reports has become required reading for a lot of Wall Street insiders over the years. As the Enron scandal unfolded and the economy soured, Dunk weighed in on 2001 reports with some tart comments — and kudos for a North Carolina firm: “Long on Words; Short on Ideas: Krispy Has Right Recipe,” is how he headlines his review.

“America’s reports reflect a difficult year–and businesses are showing the impact psychologically and economically,” he says. “Most companies seem taken aback, but a few stand out because they have new ideas, a confident stride, or a well-wrought response to a difficult atmosphere. Smaller capitalization companies appear less shaken, perhaps suggesting that many of them will have a better 2002 than their larger cousins.”

Dunk’s review will be presented in its entirety over the next three days.In the 1970s, pop psychologists unveiled for us a New American Woman who wanted her man “to be strong but vulnerable.”

Thirty years later, she has been granted her wish in spades. A reading of the 2001 Annual Reports discovers America’s chief executives busily cataloguing the endless strengths of their companies, but feeling very, very vulnerable.

Almost all of America’s giant companies give ritual testimony about their strong sinews and let us know that they’ll be awash in profits when the economy comes back. GE brags about its “diverse set of #1 franchises in global markets,” “its business initiatives such as digitization,” and a “strong balance sheet to capitalize on change and opportunity.” Bill Esrey of Sprint tells how good it all is in a Q&A entitled “Executing from a Position of Strength.” AFLAC says, “We are proud of our accomplishments,” which “points to the underlying strength of our business.” In all three instances, of course, revenues were off from 2000.

With revenues flat or declining across the industrial spectrum, with the World Trade Center attack, and with the meltdown and scandal at Enron, business leaders had and have plenty to feel shaky about. In one way or another, the media barons were most straightforward about communicating their anxiety. Dow Jones, we think, had the most effective annual report cover of the year — a picture of the Wall Street Journal on a doorstep with the words “September 11” knocked out of the center. The same picture with “September 12” comes on the next page. This journalistic event put Dow to the test, especially since its offices are next to the World Trade Center. Chairman Peter Kann, a bit restrained, owns up that Dow labored on “in the face of extraordinary challenges.”

We liked even better Tony Ridder’s comment on Knight Ridder’s 2001. “From an advertising revenue standpoint, the year began ominously and then, in a nationwide/industrywide phenomenon, quickly deteriorated.” Which is to say 2001 started poorly — and went downhill from there.

In both cases, one senses a little less bravado than one finds in the other reports, a greater willingness to admit how tough times have tested their organizations.

Watch the footnotes

At one level or another, nonetheless, uneven financial results and the Enron debacle have evinced a broad response from American business. The president’s letters and the financial footnotes have gotten much longer, with the crown for persiflage, we understand, going to the Williams Companies which apparently turned out 1,234 pages, according to the New York Times. Companies are jamming enough into their letters to excuse mediocre performance — a common practice in tough times. The smart analysts say, “When the writing gets long, watch out.”

But they’re also cramming much more into their footnotes — to keep the SEC off their backs and to keep faith with investors. GE has laid out more operating detail, particularly about financial services where it makes the biggest chunk of its profits, though it is still scanty on acquisitions which have also had a lot to do with its performance, and on its accounting methods which would determine its quality of earnings. Likewise, IBM is providing a bit more this year, its disclosure practices previously questioned by the SEC.
It is a much smaller company, however, that has set the pace in showing how to respond to the kind of questions that are raised in the wake of Enron. Krispy Kreme of Winston-Salem, North Carolina attracted unfavorable comments last year because it contemplated using “synthetic leases” in financing a new facility. Quickly enough, though, it jettisoned this financing option.

Values still ‘in’ at Krispy Kreme

As Chairman Scott Livengood said in Krispy Kreme’s Annual Report: “In the current economic climate, investors are understandably paying closer attention to the financial strength of companies and the way they conduct business. We have taken the position that there is no reason for us to do anything that could be misinterpreted, regardless of how legal and acceptable it may be.”

In the report, Livengood goes on to detail how he has changed other practices and improved governance — once again not to remedy wrongs, but to remove any appearance of impropriety.

And he goes yet a step further. His letter is the only epistle we have found this year that is totally dedicated to the subject of values. “Having a set of both brand values and internal cultural values, which is clearly expressed and widely communicated, has been and remains a key priority.” Then he goes on to talk about brand values, company values, etc. A letter that deals with values — and shows those values in action — is probably the most creative response a company can bring to a country taxed by the events of September 11 and the demise of Enron.

When we talked with Chairman Livengood, he made a direct connection between his focus on values and Krispy Kreme’s global thrust. “We are becoming more and more of a global company. As part of that effort we must make sure we are transparent about our governance, our values, and our aspirations to all our constituencies.”

Tuesday: Advice from Warren Buffett