Financial literacy: understanding and making use of annual reports.

• Author: Howarth, Carol
• Position: FINANCE

[ILLUSTRATION OMITTED]

That corporate annual report you received? The proxy? The newsletter? Did you read it? To appropriate the famous line: "Look to your left, look to your right." Only one of you actually read it.

Does it matter? Well, yes it does. Not investing time to understand the workings of the companies in which you are involved--as an employee, a shareholder, a board member--just might be a barrier to advancing Alaska's business.

How well Alaska companies operate defines our overall business climate. Good businesses generate profits that translate into cash for more investments and for paying dividends. They spin off good businesses, good employees, good citizens, and further increase employment. Management, boards of directors and shareholders all have their responsibilities to ensure this.

Management's role, besides running the business, is to disclose a company's financial performance and significant events in a timely, meaningful and reliable manner. This is the basis of "transparency." A board's role is to assure management's accountability toward shareholders and stakeholders. This is the basis of "governance." And if all is done well, shareholders can reliably evaluate a company's performance and business risk against its expected return, and then express their views through voting.

The challenge is that financial reports--something you're not likely to curl up to with a nice cup of coffee--are the primary window for peering into a company to evaluate its performance.

For those who find annual and quarterly reports mysterious, dry or dull, the question is how to take these numerical, accounting-based performance summaries and translate them into a vivid story of how well the company, say, sold books, serviced oil wells, or operated a hotel. That takes a leap from the field of accounting to finance.

Building and maintaining "financial literacy" is a challenge for everyone--from youth to corporate board members. Even the best, credentialed business people--board members of Fortune 50 companies--occasionally need to return to board boot camp to brush up on topics they've not kept current on, have changed, or are new.

One may say, "We're fine. We have a great management team," or "Our board is up to snuff." The challenge is to stay great.

TO BOARDS OF DIRECTORS

Consider the empirical evidence: Companies that worked to improve the financial literacy of their boards' auditing committees had annual returns 4.6 percent higher than...