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Many companies find themselves caught between a rock and a hard place when it comes to writing their annual reports. They understand the need for writing that is easy to read and understand. Yet, in an environment that calls for clarity and more information, the resulting copy may prove otherwise – long, legal-sounding and hard to follow. Consider this sentence from a recent Fortune 500 annual report:

If a derivative is designated as a hedge, depending on the nature of the hedge, changes in its fair value that are considered to be effective, as defined, either offset the change in fair value of the hedged assets, liabilities, or firm commitments through income, or are recorded in OCI until the hedged item is recorded in income.

According to the Flesch Readability Index, which measures ease of reading, this passage scored 12.3 on a 100-point scale of readability – slightly more than the typical auto insurance policy. Most writing, along with publications such as the New York Daily News and Sports Illustrated, falls into the 60 to 70 point range. The Wall Street Journal averages 43 points. The higher the number, the easier it is to understand the writing.

It’s All About Clarity
The point? Annual report readers want more company information, but they want it dished up in a clear, brief and useful manner. They want financial data laid out for quick and easy access. And readers want the Letter to Shareholders, MD&A and other copy to be relevant, interesting and easy to understand. Makes sense, right? So why do so many annual reports fall short of these goals?

For one thing, those closest to the project may not be the best judges of clarity and readability. Frequent contact with accounting and legal terms and corporate jargon tends to make a person familiar with, and thus unaware of, unnecessarily complicated writing that often appears in annual reports.

Another reason why most annual reports are hard to read is that it is the nature of financial reporting to score in the lower third of the readability scale. Here, reading ease is geared toward those with at least a four-year degree. The Flesch Readability Index is meant as a rough estimate. The author hoped readers didn’t "expect a magic formula for good writing" and that they "[wouldn’t] take [the Readability Index] too seriously." The Reading Ease score is calculated using the average number of syllables in each word and the average number of words per sentence. So, the more lengthy the sentences and the more syllables per word in a piece, the lower the score. While annual report subject matter alone will lower the score according to the Flesch formula, it’s still a good idea to look at and strive for ease of reading.

Another measure of readability is the Flesch-Kincaid Grade Level score. It rates text on a U.S. grade-school level. Most people are comfortable reading about two grades below the highest level of education they’ve completed. The Flesch-Kincaid Grade Level is calculated based on the average number of syllables per word and the average number of words per sentence. The lengthy annual report sentence we previously discussed scored at the 12th grade level, meaning a person with two years of college would be comfortable reading it. Both the Microsoft Corporation and American Express Company 2001 letters to shareholders score at the 12th grade level on the Flesch-Kincaid Grade Level. For the curious, the reading ease score of this text is 47.7, and the grade level score is just above the 10th grade.

Getting Your Readability Checkup
There are many ways to gauge readability, but the Flesch Readability Index and Flesch-Kincaid Grade Index are the two most commonly used in the corporate world. Software is available that will score documents using a variety of methods. Most annual report writers already have the basics to check readability: a word processing application. Microsoft Word, for example, can analyze documents using both Flesch methods, as well as provide you with several other document facts. Other word-processing software packages also measure readability using the Flesch indexes and other methods. For information specific to your word-processing software, perform a search of the program’s help files using the keyword "readability."

It’s More Than a Number
Readability indexes are helpful, but they do not consider the best motivator: interest in the material. People will read at a much higher level the things they find interesting. It may prove helpful to recruit a few people from within your company who don’t typically work on the annual report and ask them to read the copy. It’s likely they will provide you with valuable feedback on readability.

The annual report is a company’s single most important communication. Whether read by an analyst, private investor or employee, make sure that the information it contains is as accessible as possible to the audience. This should be the number one concern of any annual report producer.

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