Forecast: Not So Good

The Conference Board Review^® Article

Annual reports are supposed to get people excited. Where did all the enthusiasm go?

William P. Dunk heads William Dunk Partners Inc., a management consultancy based in Chapel Hill, N.C. This article is based on his 2006-07 Annual Report on Annual Reports.

In 1918, Oswald Spengler celebrated the end of World War I by publishing The Decline of the West, his argument that the Western nations were caught up in a slow, inexorable decline, an outlook that resonated widely with the intelligentsia at that time. The book rails against both democracy and the corrupting power of money, with a passion not shared at all by modern-day intellectuals. Of course, a defeated Germany felt pretty bad after the war. By claiming that everybody was in the same sinking boat, Spengler, a German supremacist, could make his dejected buddies feel better.

But in our own time, a handful of thoughtful statesmen and original academics -- Henry Kissinger, among others -- privately talk about the decay of all our institutions, though still publicly paying lip service to the idea of continual progress and to the great things that lie ahead for mankind. For them, we are slowly coming unglued. Grandiose pessimism is somewhat back in fashion.

More sober minds would say that the jury is still out on the century behind us. Who's to say whether we've regressed or progressed since 1918? The pattern of erosion is a little clearer over the last fifteen years. The end of the Cold War and the triumph of capitalism throughout the world -- so overwhelming that it has engulfed even Communist China -- has weakened the fiber of the West. Developed nations appear to have lost their raison d'être and have been swept off their feet by the rush of digital technology and the fecklessness of global dynamism. The corporation has become arthritic at the moment that should be its zenith.

What annual reports over the last two years reveal is that the corporation -- or, rather, the corporation as we knew it -- has been caught up in a frenzy of dismemberment and disfigurement. From 1975 on, as world markets grew increasingly demanding and political leadership in the Western world failed to tend the store, companies in all the developed nations began to chop off divisions, cheapen their product offerings, and, worst of all, strip their middle-management ranks, while pretending they were just shedding a little excess fat. They cut to the bone. All of this was done with the help of management consultants who offered all sorts of nostrums that purportedly would turn senile corporations into young studs but that really just put a smiling face on relentless cost-cutting.

For several years, the culprit was a B-school fad: business process reengineering. Its chief cheerleader was a onetime MIT professor named Michael Hammer who said that the task for corporations was to design out make-work that added no value and build orderly, automated processes that led to high value creation. This effort itself led to a whole lot of make-work in which the deck chairs got pushed around the corporation, but it did not much change where the enterprise was headed. If looked at from the planet Mars, companies seemed to be up to the same things that had kept them busy for decades. Where reengineering worked to some degree, it sliced out a chunk of expense and a bunch of people. It was just a process -- not a belief system that would help the corporation to accommodate itself to an entirely new world.

Unfortunately, Hammer, while relentless, was not as entertaining as Mike Hammer of I, the Jury detective-story fame, whom history will better remember. Reengineering was not only fruitless for society -- it was humorless.

The difference circa 2007 is that companies don't much bother to put a happy face on what they are up to -- in their reports or anywhere else. All the window dressing has been stripped away. One way or another, they nakedly cut in-house employee cost and shift work to other venues, particularly China and India but also Eastern Europe and a host of other places.

By and large, companies' annual reports have become as emaciated as they are -- a far cry from the days of gala annual reporting in the 1960s and '70s, when the CEO personally put considerable energy into the published document about his doings. Then his target was individual shareholders, small and large, rather than hedge funds, and these shareholders cared more about growth and good products than about margins. Today, most of the reports that pour across the threshold consist of a hodgepodge of paper directed at regulatory bodies sandwiched between a cover and a president's letter; the typical package does not serve to raise our expectations for the corporation or the economy but, rather, further hints at decline. (Annual-report quality has declined at about the same rate as the American newspaper. Ironically, the newspaper is very much alive and well in both China and India.)

Nonetheless, the most astute businesspeople heading public companies, both here and abroad, still turn out reports that tell us which way the wind is blowing, point out where we should invest, and suggest changes in political economic policy that might make the world hum a little better.

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