Sunday September 21, 2014
COVER STORY

Hunting Big Gains

The best CEOs are always on the lookout for the next big thing. A reading of some 200 annual letters to shareholders netted 10 “best” and 6 “special mention” examples.

As hunters of big gains, CEOs can never bank on bagging a rare deal, but the best leaders relentlessly pursue these elusive acquisitions for the good of the company. If they come home victorious, they can mount their newest gain on the corporate mantel. If they come home empty-handed, they must prepare to explain what happened to shareholders.

Illustration by Greg Copeland

Sharing news of a successful quest with shareholders tends to be less trying than describing an unsuccessful expedition, though Berkshire Hathaway Chairman and CEO Warren Buffett is adept at both. “Our total investment of about $12 billion soaks up much of what Berkshire earned last year,” Buffett writes in his 2012 shareholder letter. “But we still have plenty of cash and are generating more at a good clip. So it’s back to work; Charlie and I have again donned our safari outfits and resumed our search for elephants.”

How obstacles—and proposed solutions—are communicated by corporate leaders to their stakeholders demonstrates the difference between a CEO who actively engages with shareholders and one who is missing out on a prime opportunity. “Most shareholders, if they read anything in the report, they read the letter. It’s the one time all year for the CEO to communicate with investors, other than in special circumstances such as a merger,” says David Kass, Tyser Teaching Fellow at the University of Maryland Smith School of Business and a holder of Berkshire Hathaway stock. “Hopefully it’s crisp, clear, and interesting enough to keep them reading the whole report.”

A CEO’s annual letter is an opportunity for both management and investors. CEOs can narrate the company’s story for the past year, explain what went well and what didn’t, and in turn inspire investor confidence in the company. For shareholders, it offers a glimpse into the inner workings of the company and clues to where management is planning to take it. “Current shareholders and potential investors are primarily looking for a retrospective and prospective overview of the company,” Kass says. “They are hoping for a clear, concise, and candid discussion—the three Cs—and to see performance, priorities, and projections—the three Ps—addressed.”

Buffett minds the “Cs” and “Ps,” and his letter remains the gold standard. “I’m sure others will try to emulate him in the future—I hope they do,” says Kass.

Last year, NACD Directorship published its inaugural list of the best annual shareholder letters of the Fortune 200. This year, the team evaluated letters from member companies of Business Roundtable (BRT) filed for 2012. BRT was selected because of its reach: member companies comprise about one-third of the total value of the U.S. stock market and pay $182 billion in dividends to shareholders annually.

Some names on the list will be familiar. Berkshire, JPMorgan, GE, Coca-Cola, and Allstate all deserved mention again. Some of the selections may surprise readers, but letters were evaluated based on their level of transparency and the quality of the narrative. The letters excerpted in the following pages exemplify CEO communications at their best—10 overall best letters and 6 others deserving of recognition for special circumstances.

Warren’s World
The greatest shareholder letter in the world is postmarked Omaha, Nebraska, once again. True to form, its author, aka “the Oracle of Omaha,” shares pearls of investing wisdom in this magnificently crafted, Cliff’s Notes version of his annual meeting question-a-thon.

Warren Buffett begins his 2012 letter with a review of the company’s results measured against his self-created (one might say self-inflicted) benchmark that will always understate Berkshire’s superb performance. He takes up several pages of the report to explain why he and Vice Chairman Charlie Munger judge themselves by comparing Berkshire’s increase in book value with the S&P percentage gain (where he throws in dividends with price appreciation). This overly conservative approach can put Berkshire’s steady, intrinsic growth at a disadvantage to the index’s short-term euphoria. But Buffett is the pitcher who simply refuses to count unforced errors toward his no-hitter. He then parses business theory with personal philosophy and some old-fashioned patriotism thrown in for good measure, while showing a lust for success and growth that is as palpable as any healthy teenager’s. Call him the Octoteen of Omaha. —Jeffrey M. Cunningham

Berkshire Hathaway
Warren Buffett, Chairman and CEO
Date: March 1, 2013
Length of Letter: 8,137 words

“A number of good things happened at Berkshire last year, but let’s first get the bad news out of the way.”

“When the partnership I ran took control of Berkshire in 1965, I could never have dreamed that a year in which we had a gain of $24.1 billion would be subpar….”

“One thing of which you can be certain: Whatever Berkshire’s results, my partner Charlie Munger, the company’s Vice Chairman, and I will not change yardsticks. It’s our job to increase intrinsic business value—for which we use book value as a significantly understated proxy—at a faster rate than the market gains of the S&P. If we do so, Berkshire’s share price, though unpredictable from year to year, will itself outpace the S&P over time. If we fail, however, our management will bring no value to our investors, who themselves can earn S&P returns by buying a low-cost index fund.”

“…Mae West had it right: ‘Too much of a good thing can be wonderful’ [….] At Berkshire we much prefer owning a non-controlling but substantial portion of a wonderful business to owning 100% of a so-so business. Our flexibility in capital allocation gives us a significant advantage over companies that limit themselves only to acquisitions they can operate.”

“There was a lot of hand-wringing last year among CEOs who cried ‘uncertainty’ when faced with capital allocation decisions (despite many of their businesses having enjoyed record levels of both earnings and cash). At Berkshire, we didn’t share their fears, instead spending a record $9.8 billion on plant and equipment in 2012, about 88% of it in the United States.”

“A thought for my fellow CEOs: Of course, the immediate future is uncertain; America has faced the unknown since 1776. It’s just that sometimes people focus on the myriad of uncertainties that always exist while at other times they ignore them (usually because the recent past has been uneventful).
“American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance.…”

A Focus on Governance
Much like last year’s annual report, Allstate stands out for being among the few companies to include both a letter from the president/chairman/CEO and the full board of directors. Allstate Chief Thomas J. Wilson begins his letter with financial highlights and then explains how the insurance company’s strategies have allowed it to achieve these results. The board’s detailed letter describes a shift from a rotating to a lead director structure, a decision to limit the number of outside boards on which directors may serve, and changes made to its executive compensation program. The openness in which the board describes these key governance transitions is crisp, clear, and concise. —CSM

Allstate
Thomas J. Wilson, Chairman, President, and CEO
The Board of Directors
Date: April 10, 2013
Length of Letter: Wilson: 1,032 words, Directors: 938 words

Thomas J. Wilson
“Growth is the lifeblood of longevity. The dramatic increases in severe weather since 2008 necessitated that we reduce the size of the homeowners business. However, in this past year, we established a goal to begin to grow insurance premiums. We EXCEEDED this goal through the acquisition of Esurance; policy growth in Encompass, Allstate Canada and Emerging Businesses; and higher average auto and homeowners premiums in the Allstate brand.…”

“The Allstate board listens to shareholders, provides advice and counsel to management, promotes transparency and governs the corporation. This experienced team continued to perform at a high level, adapting its practices to ensure that shareholders are well represented, as highlighted in our letter in the annual proxy statement.”

Board of Directors
“We made several changes to Allstate’s executive compensation program for 2012…We would like to highlight the following changes:
“Performance stock awards. We replaced time-based restricted stock awards with performance stock awards (PSAs). PSAs are earned upon achievement of future return on equity targets [....]

“CEO Compensation. Mr. Wilson’s target compensation was below the benchmark 50th percentile for the last several years. Based on improved business results, his continued tenure and experience as Allstate’s CEO, and an independent compensation consultant’s review of market and industry data, we increased Mr. Wilson’s incentive compensation targets. The changes place Mr. Wilson’s total target direct compensation opportunity at approximately the 50th percentile of our compensation peer group. The performance-based incentive compensation design requires strong corporate performance before Mr. Wilson’s actual compensation increases.…”

Mea Culpa
When the going gets tough, the tough are supposed to get going, but if you happen to be Sir David Walker, chairman of Barclays, you get going on the most candid annual shareholder letter imaginable.

Walker’s letter gets right to the heart of things—his opening line indicates this was Barclay’s annus horribilis. In the past year, shareholders have seen a princely bounty disgorged to the authorities, the departure of their non-executive chairman and their CEO, and yet still increased scrutiny from global regulators. But Walker prefers his medicine without treacle, in major dollops, and refuses to spread it around by blaming fate or anyone else.

The plan now is to reckon with shareholders and customers—which if they are only perplexed would be good news. Walker faces the music by turning up the volume—he recites the list of penalties, notes the resignation of the former chairman and the CEO, reports the damage to customers and shareholders, and spells out the lessons learned and the plan to march full speed ahead. By doing so, he may regain their confidence and eventually, their respect.

Barclays was not the only financial services institution to get burned by Libor. But this chairman clearly signals complete transparency as part of a return to a culture defined by ethical and impressive behavior. —JMC

Barclays
Sir David Walker, Chairman
Date: March 5, 2013
Length of Letter: 1,476 words

“…Barclays experienced an extremely difficult 2012. In the wake of the announcement of the penalties relating to the industry-wide investigation into the setting of interbank offered rates, Marcus Agius chose to resign as Chairman and Bob Diamond subsequently resigned as CEO.
“The Board moved swiftly to fill both positions. My appointment as Chairman was announced in early August and the appointment of Antony Jenkins as CEO was made at the end of that month.
“The announcement of the penalties in respect of LIBOR and EURIBOR rates was in addition to the provisions made in respect of the misselling of PPI to consumers and interest rate hedging products to business customers, both of which were increased at the end of the year. Stakeholders’ trust in Barclays and the banking sector generally has been severely damaged by these events. We recognise that we must rebuild that trust and are determined to win it back through demonstrating real and fundamental change in our culture, especially the way we operate. We must demonstrate that going forward we are truly serving all our stakeholders, particularly our customers and clients, the communities in which we operate and society as a whole.
“My priority as Chairman is to work with the Board, Antony Jenkins, management and employees to ensure that we win back trust and ensure that we have in place a sustainable business model that will create long term shareholder value.”

“I feel immensely privileged to be Chairman of this great organization at such an important point in its history. Barclays has a proud and successful history. Its reputation has, however, been badly damaged by recent events and it is crucial to restore trust in the eyes of stakeholders. I am pleased to say that work is well underway under the leadership of Antony Jenkins to do just that.”

Rising to the Challenge
BlackRock Chairman and CEO Laurence D. Fink opens his letter by writing: “The investment climate in 2012 could be summed up in one word: challenging.” The combination of low interest rates, uncertainty surrounding policy decisions in Washington, and a growing number of retirees were critical factors in the world’s largest asset manager’s decisions. While the economic environment was unwieldy, Fink encouraged shareholders to trust in BlackRock’s approach to risk management, noting it achieved record earnings and assets under management in 2012. Fink also highlighted the organization’s internal structure, explaining how new teams have been created to support clients’ needs and how talent is developed internally. As the company marks 25 years, BlackRock appears poised to build upon its foundation to meet new challenges. —CSM

BlackRock
Laurence D. Fink, Chairman and CEO
Date: March 2013
Length of Letter: 3,291 words

“BlackRock’s history reflects one constant commitment: to evolve our firm to anticipate and meet the needs of investors in a dynamic investment landscape. We strive every day to be students of the market and to interpret the world around us so we can determine how best to position our clients to succeed. We are constantly focused on what lies ahead—while learning from the past—with a firm belief that success rests on patient, long-term investing to deliver on client goals.”

“Investors also felt little relief from global regulatory uncertainty. The wave of post-crisis regulation in areas including proprietary trading, derivatives and the taxation of financial transactions is starting to have a cumulative effect that is reducing liquidity and increasing costs for investors to a degree that may indeed slow economic recovery. BlackRock has continued to make sure the voice of the investor is heard as policy makers consider reforms related to US money markets and financial benchmarks, and pursue complex initiatives in Europe that may significantly alter how markets operate.
“Market direction and investor behavior were further impacted by several megatrends that are reshaping the landscape for investors across the globe.
“The first of these megatrends is the aging of populations around the world. Not only are the numbers of people retiring every year growing as the boomer generation ‘comes of age,’ individuals are also living much longer in retirement without adequate preparation. Both corporate and public pension plans, as well as far too many individuals, face significant shortfalls in meeting future needs for retirement income. This funding crisis is also being compounded by the shift from employer-funded defined benefit (DB) plans to defined contribution (DC) plans that transfer the risk to individuals. In this era of historically low bond yields, this shift will leave many people woefully unprepared for retirement since individuals have made significantly higher allocations to bonds than institutional investors.”

Sharing Enthusiasm
Reading the recap of a year in the life of The Coca-Cola Co. is like taking a trip around the world. Named president and CEO in 2008 and made chairman of the board in 2010, Muhtar Kent’s enthusiasm for the company and its products, people, and customers is bolstered by impressive accomplishments and direct confrontation of the ills that haunt the world’s largest beverage maker. Kent writes with both authority and authenticity—two defining qualities of any great letter. He relies on themes introduced in past annual letters, relying on the “six Ps” to structure and prioritize the flow of information: profits, people, portfolio, partners, planet, and productivity.

Let’s start with accomplishments: a $30 billion gain in market capitalization in the last three years, the 51st year that it paid a dividend to shareholders, more than 500 brands in 32 countries. Accolades: “Best global brand” for 12th consecutive year (Interbrand), “most admired” (Fortune), “most innovative” (Fast Company).

Kent confidently addresses the risks of being a market leader in a company beset by some of the world’s most pressing issues: the economically disenfranchised, water shortages, even obesity. “…We remain constructively discontent,” Kent writes. He also reports that a bold promise to shareholders to double the size of Coke’s business around the globe by 2020 is ahead of schedule. Now, that’s a reason to share a Coke and a smile. —Elizabeth Mullen

The Coca-Cola Co.
Muhtar Kent, Chairman and CEO
Date: April 1, 2013
Length of Letter: 1,398 words

“Sharing a Coke and sharing the value created by Coca-Cola have been at the heart of our story for nearly 127 years.
“In fact, our legendary chairman Robert Woodruff believed everyone who touched our business should benefit—from shareowners like you to our bottling partners, customers, consumers, associates, suppliers, distributors, other stakeholders and the communities we proudly serve.”

“For me, one of last year’s most meaningful moments of shared value came during a September visit to Myanmar, also known as Burma, where positive political changes allowed Coca-Cola to return after a 60-year absence.
“I was deeply honored to deliver the first cases to our new customers in Yangon and meet with leaders, shop owners and other citizens. And what I remember most were their faces—shining and hopeful, with a special spark in their eyes.
“For the people of Myanmar, this was more than the return of a delicious, refreshing beverage. To them, Coca-Cola embodies the bright promise of better days and better lives ahead. And we look forward to being part of their journey.”

“We also split our stock for the first time in 16 years. In early 2013, we announced plans to increase our dividend for the 51st consecutive year. All told, between dividends and share repurchases, we returned $9.1 billion to shareowners like you in 2012.
“Over the first three years of our 2020 Vision, we’ve increased daily servings by more than 200 million, lifted our global volume and value share to the highest levels since 2003 and added more than $30 billion to The Coca‑Cola Company’s market capitalization.”

Think Macro, Act Micro
If Jeffrey R. Immelt ever tires of the C-suite, he will find steady employment writing annual report copy for a number of less verbally gifted CEOs. He positively brims with personal conviction about the ways his General Electric management team is turning huge global obstacles for everyone else into large opportunities.

In discussing the state of the company with his shareowners, he conveys appropriate awe over the changes that took place in his home market in the United States as well as in the global economy. In his sharp-eyed introduction, he speaks of a radically new focus on software and on emerging markets like Nigeria that will provide GE with billion-dollar opportunities. Until 2012, as he tells the reader, neither was considered important enough to rate a mention in a GE annual report. Now they merit headlines. Immelt manages to convey the sense that GE was built to take on especially brutally competitive, intellectually challenging, and politically charged targets.

During difficult periods such as 2012, Immelt likes to reach into his playbook to call in the GE strategic planning team. Just several years ago, in the midst of the global recession, GE was first to market among major companies with a green strategy and augured a new era of manufacturing efficiency, ideas that made sense to corporate customers during cash-constrained circumstances. Now the company is placing a stake on big ideas such as the “Industrial Internet” and reshaping itself with an infrastructure bent. Next, GE will be foremost in the shale oil revolution. Big, exciting, robust plans for a company whose lifeblood has and always will be creating big ideas that motivate workers and drive profits. —JCM

General Electric
Jeffrey R. Immelt, Chairman and CEO
Date: Feb. 26, 2013
Length of Letter: 4,620 words

“…I recently returned from Sub-Saharan Africa, a region that was “off the radar” when I became CEO. Today, we are at a $3 billion annual run rate, and that could double in the next few years. GE could have “$1 billion franchises” in Nigeria, South Africa, Mozambique and Angola. There are very few American companies in the region. But we could sell more gas turbines in Africa than in the U.S. in the next few years.”

“…We are a ‘We Company.’ We know that strong teams with great people outperform individuals. That is why GE works.
“The global economy for 2012 was within our planning scenario, but short of our hopes. Maybe the best news—believe it or not—was Europe. It didn’t implode!”

“We expect 2013 to be another ‘typical year’ in the Reset Era. We remain confident in the economic strength of the emerging markets. We are encouraged by renewed growth and reform in China, which has a positive impact on other big resource-rich regions like Africa, Latin America and the Middle East. At the same time, we are in unprecedented fiscal territory in the U.S. and Europe, which will keep a limit on growth in the short term.
“Strategy is about making choices, building competitive advantage and planning for the future. Strategy is not set through one act or one deal. Rather, we build it sequentially through making decisions and enhancing capability.…”

“So is size inherently bad? I don’t think so. But size can breed a perversion of bureaucracy, a sense of entitlement and a distance from reality. Size is bad when it crushes innovation. A good culture is the only filter that can make size a strength and not a weakness.”

Reducing Costs, Heightening Return
The phrase “expense-savings initiative” typically resonates well with those doling out the money—shareholders—but often spells impending layoffs for employees. At Goldman Sachs, both of those sentiments were felt in 2012 when the financial services firm announced a $1.2 billion savings initiative, as Chairman and CEO Lloyd C. Blankfein and President and COO Gary D. Cohn note in their annual letter. Firm headcount was down 9 percent over the past six quarters and certain business units were shuttered. Making tough decisions is no easy feat, and Blankfein and Cohn are candid about the benefits and the costs of their initiative.

In another expense area, the letter explains Goldman Sachs’ commitment to align pay with performance, noting that in 2011, when net revenues were down 26 percent, compensation and benefits were down 21 percent, and in 2012, when net revenues rose 19 percent, compensation and benefits rose 6 percent.

Additionally, the letter details how the firm gives back through programs for women entrepreneurs, small businesses, and nonprofits. —CSM

Goldman Sachs
Lloyd C. Blankfein, Chairman and CEO
Gary D. Cohn, President and COO
Date: April 12, 2013
Length of Letter: 4,281 words

“We never lose sight of the fact that we are stewards of an industry-leading franchise that was built over nearly 145 years. This means that while we have an obligation to meet the near-term demands of the current environment in which we operate, we need not completely surrender to them.
“Nonetheless, the cyclical pressures facing our industry are real, and we have responded by reducing costs and proactively managing our capital. If the environment deteriorates further, we will take additional action. At the same time, we will continue our investment in and commitment to our broad set of institutionally focused businesses that have a track record of providing higher returns than many other businesses within financial services.”

“As the industry awaits greater clarity on the final rules [under Basel 3—a global regulatory standard on capital adequacy and liquidity risk], we are carefully managing our risk-adjusted capital levels. We have a long track record of allocating capital and other scarce resources based on risk-adjusted returns, providing greater balance sheet and resources to higher return businesses while downsizing or eliminating lower return businesses.
“To assist us in making the right decisions as they relate to capital allocation, we have begun to roll out technology that enables us to see capital charges at a granular level—often by individual security. We use the software to run analyses when buying or selling securities in our sales and market-making businesses in order to understand the capital implications associated with different scenarios.”

“Managing capital usage more precisely can translate into greater risk capacity for our clients and greater capital efficiency for the firm. This provides not only a basis from which to understand and improve returns, but also operating leverage when the opportunity set expands.”

Amid Adversity, Dimon Still Shines
2013 is shaping up to either be Jamie D imon’s best year or his worst, depending on whom you ask. The financial services giant is still caught in the glare of losses and questions raised by the “London Whale” debacle, including federal investigations into the company’s operations and a shareholder push to split Dimon’s dual role of chairman and CEO. Despite the quantity of negative press and sentiment swirling around JPMorgan, Dimon remains on top—with regard to both the company and his reputation.

Theories abound about how “the sun god” manages to keep his golden image—and his job—and Dimon’s annual letter to shareholders illustrates two main requisite survival skills in the corporate jungle: effective communication and value delivery. It’s hard to vote out a man who has helped JPMorgan shares rise almost 50 percent in the last year, and who also highlights the company’s commitment to global growth, hiring veterans, and developing talent internally.

Dimon displays the same eloquence and insightfulness as he did in his 2011 letter, as he addresses head-on the issues the company faced.

It is next to impossible that a company of the size and clout of JPMorgan would ever be immune to scandal, but it is leadership, transparency, and candor in the face of such difficulties that inspire trust in both the company and its executives. When Dimon promises, “We will be a port of safety in the next storm,” you want to believe him. —CSM

JPMorgan Chase & Co.
Jamie Dimon, Chairman and CEO
Date: April 10, 2013
Length of Letter: 3,037 words

“It’s impossible to look back on the past year and not talk about the London Whale. Let me be direct: The London Whale was the stupidest and most embarrassing situation I have ever been a part of. But it is critical that we learn from the experience—otherwise, it truly was nothing but a loss. I also want our shareholders to know that I take personal responsibility for what happened. I deeply apologize to you, our shareholders, and to others, including our regulators, who were affected by this mistake.…”

“You should also know that we took strong action with those who were directly and indirectly involved. We replaced the management team responsible for the losses, we invoked comprehensive clawbacks of previously granted awards and/or repayment of previously vested awards for those with primary responsibility (more than $100 million was recaptured), we reduced or eliminated compensation for a group of employees, and your Chief Executive Officer and Chief Financial Officer saw their compensation reduced by the Board as a result of this embarrassing episode.”

“While it is normal to expect some turnover of the senior management team (as people age, want to change jobs or retire), this year we had more than our normal share. Three new members were added to the senior management team, replacing five former members (the Operating Committee now totals 12 members). Some turnover was due to the reorganization of our businesses that I mentioned in the previous section, some was due to succession planning, some was due to a desire to do something different and, of course, some was due to our CIO problem.”

“We could have delayed the reorganization within the company. Many times in my career, people have suggested we should not do something because it might add additional negative press coverage when the company really doesn’t need more. But companies have to change and move forward. Not doing the right thing for the wrong reasons usually is a bad idea.”

Technology Ecosystem
Microsoft has mythic status as an American giant, so this letter aimed high—and succeeded. This fiscal 2012 message is only peripherally about that year; its focus is on a distant future made real through the telling.

That futuristic feeling begins in the letter’s title, to “Shareholders, Customers, Partners, and Employees”—a collective view of Microsoft’s awesome mission. The shareholder story is told immediately and briefly, in 48 words, at the very start: revenue $73.7 billion, cash flow from operations $31.6 billion (up 17 percent), and returns of $10.7 billion to shareholders through stock buybacks and dividends. The remaining 97 percent of the letter is spent on why these results will be sustainable over time.

As owners, shareholders are addressed first here, but CEO Steven A. Ballmer acknowledges other participants in the value chain, including 1.3 billion Windows users, 640,000 Microsoft partners, and 8 million dedicated software developers, all the while using youthful words—“delightful,” “stunning,” “great,” “fun,” “fantastic,” and “incredible.” He concludes with a personal statement that he is “excited and optimistic” about the future, which the letter captures in very specific ways.

The word “ecosystem,” used three times, exemplifies why this letter deserves to be considered one of the year’s best. Clearly each Microsoft device operates in a much larger world that this letter makes both real and compelling. —Alexandra R. Lajoux

Microsoft
Steven A. Ballmer, CEO
Date: Oct. 9, 2012
Length of Letter: 1,398 words

“Last year in this letter I said that over time, the full value of our software will be seen and felt in how people use devices and services at work and in their personal lives. This is a significant shift, both in what we do and how we see ourselves—as a devices and services company. It impacts how we run the company, how we develop new experiences, and how we take products to market for both consumers and businesses. The work we have accomplished in the past year and the roadmap in front of us brings this to life.”

“There’s a remarkable amount of opportunity ahead for Microsoft in both the next year and the next decade. As we enter this new era, there are several distinct areas of technology that we are focused on driving forward—all of which start to show up in the devices and services launching this year. Leading the industry in these areas over the long term will translate to sustained growth well into the future. These focus areas include:

  • “Developing new form factors that have increasingly natural ways to use them including touch, gestures and speech.
  •  “Making technology more intuitive and able to act on our behalf instead of at our command with machine learning. […]
  •  “Delivering new scenarios with life-changing improvements in how people learn, work, play and interact with one another.

“We are uniquely positioned to lead in these areas given the breadth of our devices and services portfolio, as well as our large, global partner and customer base and the growing Windows ecosystem.”

“It truly is a new era at Microsoft—an era of incredible opportunity for us, for the 8 million developers building apps for our devices, for the more than 640,000 partners worldwide and, most important, for the people and businesses using our products to reach their full potential.”

A Year of Acquisitions
Conducting four acquisitions might take up a great deal of time and focus at some companies, but WESCO Chairman and CEO John J. Engel succeeds in detailing these proceedings in his annual letter along with plans for the upcoming year, last year’s performance, and the value of sustainability and diversity both within the company and on the board. The company touted its successes with its “One WESCO” and “LEAN” projects, and emphasized the benefits stemming from its culture of “high performance and continuous improvement,” including recognition from 2020 Women on Boards and Catalyst for having at least 20 percent of its board and 25 percent of its executives composed of women. —EM

WESCO
John J. Engel, Chairman and CEO
Date: March 1, 2013
Length of Letter: 1,596 words

“…We also completed the acquisitions of EECOL Electric, Conney Safety Products, RS Electronics, and Trydor Industries, which further solidified our strong electrical core and added new product and service categories to our company. Acquisitions have been a fundamental element of our growth strategy since we spun out of Westinghouse in 1994, and we have accelerated our pace over the last several years. Since June 2010, we have completed eight acquisitions, which represent approximately $1.5 billion in revenues and over $1.50 of EPS accretion. We have a long track record of successfully identifying, closing, and integrating acquisitions, allowing us to consistently deliver on our acquisition commitments.
“In 2013, cash redeployment will be directed primarily toward debt reduction and bringing our leverage ratio back within the targeted range. The strong and consistent free cash flow generation characteristics of our business during all parts of the economic cycle support our ongoing acquisition strategy.”

“We are celebrating the ten-year anniversary of our LEAN journey this year. The application of LEAN to the entire value chain, from our customers through to our suppliers, has been transformational. Although ten years into this continuous improvement journey, we see more opportunities to improve our business and our customers’ operations and supply chains than ever before.…”

“It is also encouraging to be recognized for our diversity efforts. In 2012, we received the highest designation from 2020 Women on Boards for having at least 20% of our Board of Directors being comprised of women. In addition, the 2012 Catalyst Census of Fortune 500 Women Executive Officers and Top Earners recognized us for having at least 25% women executive officers. We are confident that the investments we are making in our people provide us with the required capacity to continue to grow and strengthen our market position. All of our talent management efforts are based on the belief that our people are our sustainable competitive advantage.”

SPECIAL MENTIONS

For the past 26 years, The Carlyle Group has staked its reputation on being “different.” Instead of setting up shop on Wall Street, like most financial firms, the alternative asset management firm headquartered itself in Washington, D.C. Founders William E. Conway Jr., Daniel A. D’Aniello, and David M. Rubenstein reiterate how this focus on standing out has helped the firm deliver returns to investors, and how it will continue to do so as a newly public company.

The letter emphasizes culture. Carlyle distinguishes itself through collaboration across continents and funds: “When a professional in São Paulo, Sydney or Shanghai needs help on a healthcare deal, for example, sector experts in New York or elsewhere step up, helping with due diligence and value creation— that’s One Carlyle.” —CSM

The Carlyle Group
Daniel A. D’Aniello, Chairman
William E. Conway Jr., Co-CEO
David M. Rubenstein, Co-CEO
Date: April 15, 2013
Length of Letter: 840 words

“Carlyle pioneered the multi-product, multi-geography alternative asset model, touching virtually every corner of the globe. We have the broadest reach of any global alternative asset manager.…”

“Culture can’t be bought or bottled; it’s organic, forming and rising from decades of nurturing and people interacting with each other. As a result, One Carlyle is woven into the fabric of our firm. It is essential to our success.
“As we prepared to go public in early 2012, we affirmed that the interests of our fund investors came first, believing strongly that our new public investors would also benefit. A year later, the results are in. We believe our solid returns are a powerful indication that this approach works for our fund and public investors alike.”

“Overall, 2012 was an outstanding year for Carlyle, but not all went as planned. Some of our real estate investments struggled, particularly in Europe. And in the United States, LifeCare filed for bankruptcy and Carlyle has written off its equity investment in Synagro. Nonetheless, we believe our deliberately different approach to structuring our firm, developing and harnessing knowledge, and creating a collaborative culture forms a foundation for us to do even better in 2013 and beyond.”

Execution and Efficiency
Celebrating the 200th anniversary of its founding, and having fully recovered from the financial crisis and the ouster of its CEO, the letter to shareholders written by new CEO Michael L. Corbat comes across as warm and caring, a soothing balm after a tortuous five years in which Citi saw its earnings-per-share price—and virtually every other metric—plummet. He writes that throughout his 30-plus-year career at Citi, he has always believed that “you are what you measure.” He has set clear targets and made them public, and Citi has expanded into parts of the globe that contain some of the fastest-growing markets. —Judy Warner

Citigroup
Michael L. Corbat, CEO
Date: March 1, 2013
Length of Letter: 1,871 words

“I’m often asked how I would judge my tenure as CEO a success—what do I want the company to look like down the road?
“First, I want Citi to generate consistent, quality earnings. We’ll accomplish this by driving client relationships and building revenues organically in our core businesses. The future of our franchise depends on consistently generating quality earnings from our core business activities. Specifically, I want to see us generate risk-adjusted returns above our cost of capital.
“Second, I want Citi to be known for making smart decisions in every aspect of our work. It is imperative that Citi be a firm with the right focus on efficiencies and is smart about risk—both in terms of dollars and reputation—as well as investment performance and growth. And we’ll build a culture of accountability and judge our people on the decisions they make and the results they deliver—or fail to deliver.
“Third, I won’t be satisfied until Citi has completely rebuilt our credibility with all our stakeholders. Ultimately, our results will speak for us. My goal is for Citi to be seen around the world, and by all our stakeholders, as an indisputably strong and stable institution.
“How do we get there? One word: execution.
“As I said when I stepped into the role, while our core strategy is not changing, the intensity with which we focus on execution and on operational efficiency will increase. We’ve refined our management structure in ways that delegate authority to the appropriate levels.”

Transformation and Transition
ConocoPhillips spun off its downstream operations into a separate company, Phillips 66, as of April 30, 2012, to focus on its exploration and production business, leveraging its “legacy as a major company in terms of its size and breadth, yet offer[ing] the compelling organic growth more common to independent companies,” Ryan M. Lance writes. He proposes five “priorities” that shape the reformed company’s culture: maintain a relentless focus on safety and execution, offer a compelling dividend, deliver 3 to 5 percent compound annual production growth, generate 3 to 5 percent compound annual margin growth, and focus on improving returns. In addition to a focus on building a financially successful business, Lance emphasizes employee safety, sustainability, and benefits for all involved stakeholders as essential aspects of the company’s continued success. —EM

ConocoPhillips
Ryan M. Lance, Chairman and CEO
Date: Feb. 19, 2013
Length of Letter: 1,465 words

“…Our vision is to be the company of choice for all stakeholders. We believe we have the portfolio and people to make this possible.”

“…Even though our transformation is not yet complete, we have made measurable progress. During 2012 we delivered adjusted earnings of $6.7 billion, or $5.37 per share, and a return on capital employed of 11 percent. Our per-share adjusted earnings reflected a reduction in average share count of about 10 percent through our share repurchases in 2012. Our operational performance was strong. Total production was 1,578 MBOED and we replaced 156 percent of our production with new reserves on an organic basis. With our major projects on track, drilling programs performing well and exploration activity gaining momentum, we are well positioned to deliver our unique combination of growth and returns.”

“Our exploration program is building momentum. We succeeded in replacing more than 100 percent of production in each of the past four years with organic proved reserve additions at competitive finding and development costs. We ended 2012 with proved reserves of 8.6 billion BOE and total resources of 43 billion BOE [.…] We expect exploration to contribute to our organic growth in years to come.”

“As we close a year of achievement and begin another that is full of promise, I extend my sincere appreciation to ConocoPhillips employees and our board of directors for their contributions to our success and to our shareholders for their ongoing support.”

Battling Mother Nature
Energy producer and transporter Dominion Resources faced a tough year as a number of storms ravaged the eastern seaboard and the Midwest, but the company engaged its best resources and used the opportunity to band together with its customers and fellow utility companies and their workers. Thomas F. Farrell II casts a positive light on a year dark for many reasons—the devastating storms, the widespread power outages, and less than optimal financial performance. Despite returns lower than anticipated, as operating earnings dropped by 22 cents per share instead of meeting the targeted 5 to 6 percent growth, the company’s three- and five-year returns outpaced peers and major indices, and the company paid out a dividend of $2.11 per share, up 7.1 percent from 2011. A detailed assessment of future plans and projects and Farrell’s consistent reminders to investors that this is “your company” demonstrate the company’s dedication to moving forward arm in arm with investors, customers, and stakeholders. —EM

Dominion Resources
Thomas F. Farrell II, Chairman, CEO, and President
Date: Feb. 28, 2013
Length of Letter: 3,805 words

“One important issue was notably absent from the [2012 presidential] debates. The candidates paid scant attention to energy policy. But voters in our service areas received an education in real time about the importance of reliable, safe power. In late June, summer storms swept through the Midwest and mid-Atlantic, resulting in massive power outages in, for instance, Virginia. Then, just days before the election, Superstorm Sandy roared into the Northeast, leaving in its path unimaginable suffering and devastation.”

“In a word, 2012 for your company was defined by weather. Whether stormy or mild, Mother Nature had an enormous impact on Dominion in 2012.”

“…After the violent summer storms, many Dominion [Virginia Power] customers excitedly posted on Twitter and Facebook about spotting bucket trucks from Duke Energy Carolinas, Oncor, Gulf Power, Progress Energy Florida, Centerpoint Energy and even Canada’s Hydro One.

“Paradoxically, storms can tear things apart, but they can also bring utility companies together. We thank our fellow workers in all these companies for standing shoulder to shoulder with us in Virginia and North Carolina. Our response could not have been so decisive and swift without their essential aid.”

“We missed on our operating earnings targets, principally because of mild weather. And the company’s total shareholder return lagged that of the Dow Jones Industrial Average and the S&P 500, in part because of uncertainty in the markets regarding dividend tax policy.

“But Dominion also:

  • “Paid a strong dividend.
  • “Followed through on important safety measures and goals.
  • “Continued progress on our long-term growth plan.
  • “Refined our business model to help meet future operating earnings targets, increase the 2013 dividend rate and payout ratio and achieve future return on invested capital (ROIC) goals. And
  • “Contributed $21.3 million to meet essential human needs and support environmental stewardship, education and community vitality in the states where we do business.”

A New Beginning
James E. Rogers isn’t just writing to Duke Energy shareholders. He addresses his annual letter to the company’s “fellow customers, investors, employees and all others who have a vested interest in our success—including our partners, suppliers, policymakers, regulators and communities”—perhaps because each of those audiences were also entrenched in the controversy surrounding the merger between Duke Energy and Progress Energy last year. While the deal created the largest electric company in the United States, it also shined a spotlight on allegedly dubious corporate governance practices. Mere hours after the merger was completed, Duke’s board ousted Progress Energy CEO Bill Johnson—who was to lead the combined company—and later reinstalled Duke Energy CEO Rogers. An investigation was launched to determine whether Duke executives and directors were telling Johnson he would run the show while secretly plotting to give him the heave-ho. The matter, settled in November, required Rogers to step down as CEO by the end of this year. Rogers was replaced as CEO on July 1 by CFO Lynn Good. Lead Director Ann Maynard Gray was elected to succeed Rogers as chairman at year’s end. In his last letter as CEO, Rogers is up front about the challenges surrounding the merger, including employee layoffs, and says the electric company is positioned to be a “new Duke Energy.” —CSM

Duke Energy
James E. Rogers, Chairman, CEO, President
Date: March 8, 2013
Length of Letter: 2,977 words

“I’m grateful for our employees’ resilience. They turned 2012, a year of extraordinary uncertainty, into a year of great accomplishment in meeting our operational and financial objectives. They also achieved the best employee safety record in our company’s history. The way they have pulled together bodes well for our future.
“…What matters most is what we do now, and how we do it. Despite complex issues still in front of us, we’re on our way to demonstrating the tremendous potential of Duke Energy.”

“More than 1,100 employees have left, or are in the process of leaving, the company through the Voluntary Severance Program as we have begun to achieve efficiencies with the merger.”

“A decade from now, we will look back on 2012–2013 as a great new beginning for this company and the people who count on us.”

Succession Plans of Steel
NUCOR’s message to shareholders is three in one. It begins as a newly named and long-respected executive chairman hands a bright CEO torch to a promising successor, with the chairman, Daniel R. DiMicco, focusing on the steel maker’s past accomplishments and the CEO, John J. Ferriola, looking to the future. They save the last word for the lead director, Peter C. Browning. Clearly good succession, like steel, does not come ex nihilo, but is carefully forged by many over time. —ARL

NUCOR
Daniel R. DiMicco, Executive Chairman
John J. Ferriola, President and CEO
Peter C. Browning, Lead Director
Date: 2012
Length of Letter: 3,740 words

“…For years, I have discussed with you the board’s commitment to strategic succession planning, and John’s ascension to CEO is the latest result of that commitment. John brings a rich set of experiences, having served as general manager, executive vice present, leader of Nucor’s steelmaking operations and chief operating officer before taking over as CEO. The board looks forward to working with John and continuing our robust succession planning process in the coming years.”

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