While the government remains shutdown, the Securities and Exchange Commission (SEC) remains open, and Chairman Mary Jo White opened the final day of the National Association of Corporate Directors Board Leadership Conference with an overview of what the commission has been focused on and where its attention will be directed in 2014.
As a former director who served on an audit committee, White understands the weight of the responsibilities placed on the shoulders of boards—particularly surrounding disclosure requirements. While the core purpose of disclosure is to provide investors with relevant information they need to make informed voting decisions, over time the list of disclosures has grown and become more specific, causing some to raise flags about disclosure becoming too intricate. “I’m not suggesting investors haven’t benefitted from this information—much, if not all, of it could be relevant and necessary, even though some insist investors don’t take advantage of it,” White said. “I am asking if investors need and are served by the detailed disclosures companies currently provide to the SEC. It can lead to info overload.”
Methods of improving disclosure are perennial topics, and White says there is still more to be done from her perspective. “But before we can move to improvements, we need to know why we have the information we have in disclosure today,” White explained, noting that the JOBS Act requires the SEC to review current disclosure requirements and consider how to modernize and simplify them for emerging growth companies. She said the staff is finalizing these rules and expects to make them public soon.
White also noted that some disclosure requirements may be past their prime. “Some requirements that were appropriate in the past may not reflect how investors use this information today,” she said, using the example of when annual reports were what investors looked to for historical closing prices and now this information is available almost immediately online.
“While much of what some term the ‘disclosure overload’ is a result of regulation, there are other sources,” White said. Due to investor demand, some companies made the decision to disclose more information than required to reduce risk of litigation claims of insufficient disclosure. “We think these additional disclosures are a good thing, but we should be careful not to have too much of a good thing,” White said.
For all the hyper-connectivity in today’s world, CEOs and boards have precious few opportunities to reach out to shareholders in a way that is personal, memorable and compelling. Most communication between the C-suite and investors is filtered through multiple handlers and channels. The requisite legal and regulatory compliance language is often such a distraction that the real meaning, and the real intent, of the message can be lost.
The annual letter on the “state of the company” included with a company’s annual report is an ideal tool for CEOs and board chairs to more closely communicate with all shareholders, from global institutions to the smallest investors. Yet too few companies fully seize on this ready-made opportunity. Many CEOs are content to just keep it short and focus on the financial story, offering little context on the events that defined the past year and no articulated vision of what investors can expect in the future.
It’s a missed opportunity, as CEOs could and should be using the annual letter to provide all shareholders a glimpse into who they are and how they’re running the company. They could and should be sharing their best thoughts in their own voice, spotlighting issues and topics in a way that will build confidence among investors that the right management team is at the helm.
The undisputed master of this forum is (no surprise) Berkshire Hathaway Chairman and CEO Warren Buffett. Buffett’s annual letter to shareholders topped the recent NACD Directorship magazine’s list of Best Annual Shareholder Letters, which evaluated the entire Fortune 200 list.
Buffett’s letter is understated yet highly informative, giving credit where credit is due, reinforcing the corporate business strategy, and setting the table for how he wants investors (and others, including analysts and media) to perceive the company and its leadership.
On each of the five criteria that NACD Directorship uses to analyze CEO letters, Buffett was in a class of his own. His letter provides a dynamic assessment of the corporate performance, full transparency, a clear outline of the steps Berkshire Hathaway is taking to tackle its challenges, a strategic process that accounts for environmental changes, and insights into the corporate management style. Buffett transforms the shareholder letter from a simple formality into a major influencer on how his company is perceived.
As a tool that actually builds shareholder value, Berkshire Hathaway’s letter is in a class by itself but certainly not the only notable example. Coca-Cola, FedEx, General Electric, General Motors, Google, and Wal-Mart all stood out as companies that go beyond formalities by utilizing the annual report letter as a critical communication tool.
NACD Directorship also singled out others—including the Bill and Melinda Gates Foundation, Abbott Laboratories, Amazon, Avon, Exelon, Hewlett-Packard, News Corp., and Zipcar—for how their letters coherently explained and evaluated special circumstances that had arisen.
All of the letters on this year’s list of the best offer a real insider’s view—and it is, after all, the essence of effective IR to help investors feel they’re personally part of the team. Executives act like leaders when they show their stakeholders how they lead.
For more examples of great shareholder letters, visit www.NACDonline.org/Power-of-the-Pen. We hope they inspire you to utilize some powerful communications strategies of your own.