Corporate marketing materials have never been equated with book publishers, nor confused with best-sellers. But this year, the annual reports hitting the desks of investors arrive with the distinction of being instant collectors' editions.
Blame it on Enron. Or, more realistically, consider it a harbinger of things to come. However you see it, this year's annual reports, specifically the CEOs' letters to shareholders, will be scrutinized by investors, employees, and media alike. They will all be in search of signs that these CEOs are taking the opportunity to differentiate their companies from those whose financial disclosure policies have rocked corporate America.
Investing legend Warren Buffett of Berkshire Hathaway authors a perennial classic in the "letter to shareholders genre. It serves as a reference and time-tested example of what investors will likely cite as an example of "full disclosure in coming years. At more than 20 pages in length, the actual shareholder letter presents a veritable guideline of practical insights and long-term views for investors on which to base their decisions.
Buffett has been writing the same type of annual report for many years - even at times when he was under enormous pressure and temptation to change. During the dot-com era, some argued Buffett was missing the investment opportunity of a lifetime. Today, his methodologies are back in vogue.
The evidence lies with the 23% average annual gain for his shareholders over the past 20 years, versus the 0% to 3% growth rate espoused by most prognosticators today.
So what can CEOs with writers block learn from Buffett's approach? Well, wishy-washy is out, and honesty is in. Honesty gives even more credibility to those successes that were realized. After commenting about Geico's good year, Buffett admitted, "The only disappointment at Geico in 2001 - and it's an important one - was our inability to add policyholders."
Another tip we can learn from Buffett is to be clear about how the corporation actually earns its revenues. He spends six pages describing how Berkshire Hathaway's core business, insurance, makes money. Investors should see how sales teams build relationships with customers, and how the investment in new technology last year actually dropped more profit to the bottom line. No one knows what it means when a company says it is "expanding its operating leverage. The more investors understand a business, the less likely they are to sell the stock during an operating hiccup.
Buffett's capacity for intellectual honesty remains awe-inspiring. In his annual report this year, he takes little credit for the four good acquisitions in 2001, but pounds himself for the acquisitions that have failed in the past few years. The biggest complaint of investors is post-acquisition information. They read the five-page press release when it's announced, but are then forced to accept radio silence from the company during the 12-month "integration period that follows.
The shareholder letter is an opportunity to talk about the milestones achieved since the acquisition, to take another shot at convincing shareholders the cost wasn't too high, or re-explain the more intangible impact the deal is having on P&L. CEOs always complain that investors won't give them future value for acquisitions. Maybe it's because they haven't earned the shareholders' trust.
In the end, it's all up to the author. Most CEOs forget that audited accounting statements were not created to help investors gauge valuation or performance. This is why buy/sell side analysts translate statements and company commentary into valuation and performance metrics not found in audited statements. CEOs who bemoan the influence of sell-side analysts are missing the point. They can control this process.
Should CEOs revamp their shareholder letters and start to churn out 20-plus pages next year, like Warren Buffett? Not necessarily. An exact template for the letter to shareholders is nonexistent. But, whatever form it takes, CEOs must seize control of their communications. If not, given the SEC's current focus on personal liability for executives, not only may the stakes may be higher than ever next year, but also the stories penned by CEOs likely won't have happy endings.