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Wall Street is about numbers: P/E ratios, assets on hand, outstanding debt, value at risk, return on equity. All those metrics carry a wealth of significance for investors seeking insight into a company’s prospects. But shareholders should not overlook another potential source that taps into the mind of the chief executive: the annual shareholder letter.
Illustration by Greg Copeland
Annual letters can be mercifully short and simple. But the best annual letter writers recognize that managing a complex enterprise has elements of empire building, battlefield risk and quelling social unrest among shareholders, and they have a knack for bringing investors into these issues with often colorful and candid disclosures about the pros and cons of running the business. The most effective letters also reveal a company’s spirit or culture; they convey optimism (or pessimism) about the future and the company’s plan for staying the course better than any spreadsheet.
Eric Heyman, senior vice president and director of research at Olstein Capital Management, notes that effective shareholder letters clearly articulate the company’s strategy and offer specifics about the types of benchmarks the company expects to achieve in a candid, open and realistic manner.
“A shareholder letter is not only forward looking but backward looking,” Heyman explains. “A CEO really has to communicate to the investment community what took place during the year, what goals the company set and how it met or didn’t meet those goals, and what the changes are going forward. Shareholders need that information to make better decisions on how to view their investments.”
One particular element of a successful shareholder letter is consistency, says Heyman. “You want the same candid, clear, concise communications in good times and in bad times,” he explains.
L.J. Rittenhouse, president of Rittenhouse Rankings, an investor relations firm, has analyzed shareholder letters for more than a decade and has developed a model to quantify the amount and quality of content in a letter. The company annually ranks letters based on high and low measures of candor, and it has found a positive correlation between candor and share prices. Rittenhouse says there are several characteristics she looks for in effective letters: strategy statements, capital stewardship metrics, a discussion of the business model, accountability systems, innovations, leadership, stakeholder relationships and overall candor.
Fortunately, there are more than a few CEOs who are visibly and vigorously excited about their companies. The letters excerpted on the following pages illustrate 10 exemplary communications by CEOs, chairmen and, in one instance, a board of directors, that provide value to shareholders beyond a simple snapshot of the company’s financial state. Also included are seven letters (including one from a recent internet IPO) that because of the special circumstances addressed in a clear, straightforward manner deserve mention.
Selection Methodology
NACD Directorship primarily examined annual report letters from Fortune 200 companies filed for 2011. While a few of the selections may raise eyebrows due to recent events, controversy is not equated with bad management. Even when led by the most highly regarded CEOs, the complexity of these global enterprises may cause circumstances to reorganize in such a way as to surprise everyone. That is the lesson of capitalism. Letters were chosen based on those communications that even in the most challenging times show foresight, clarity and conviction. Those featured here were evaluated across industries using the following criteria:
- A dynamic assessment of the company’s performance
- Transparency on both positive and negative news
- A clear outline of steps to tackle company challenges
- A strategic process linked to changes in environment
- Insights into the quality of management and its commitment to creating shareholder value
The 8 Rules of a Great Annual Letter
Berkshire Hathaway
By Jeffrey M. Cunningham
Letter writer: Warren Buffett, Chairman, CEO
Date on letter: Feb. 25, 2012
Length of letter: 18,426 words
On Feb. 25, 2012, the best oddsmaker in America— who happens to live not in Las Vegas or Atlantic City, but in Omaha—penned his annual letter to shareholders on the bets placed the year before. To translate the dry, quantitative concepts of business into Buffettese is an exacting task, and one that he approaches with legendary skill. While he takes credit for performance when it’s due, he is equally enthusiastic about pointing out the errata in his storied quest for value creation. Both are examples of what sets great chief executives apart: a palpable conviction in their vision and a willingness to learn from downdrafts as well as windfalls. In adhering to a rule of “anything but truth is unspeakable,” always borne by the facts, argued with determination and proffered to shareholders who decide with their wallets, Buffett reveals how well he knows his customer. Berkshire’s shareholders expect nothing less than that the boss subject himself to the same fierce scrutiny that he demands of his bullish investments. He has been at this for more than 40 years, so he’s fairly confident of the mechanics of the enterprise, yet not a year goes by without something that shocks and amazes him. And when it does, like an excited schoolboy, he can’t wait to bring the new learnings to the attention of his shareholders. Here are the eight rules distilled from one of the greatest businessmen of our lifetime.
Rule 1: Master the art of understatement.
“Charlie Munger, Berkshire’s Vice Chairman and my partner, and I feel good about the company’s progress during 2011.”
Rule 2: Give your board credit.
“The primary job of a Board of Directors is to see that the right people are running the business and to be sure that the next generation of leaders is identified and ready to take over tomorrow. I have been on 19 corporate boards, and Berkshire’s directors are at the top of the list in the time and diligence they have devoted to succession planning. What’s more, their efforts have paid off.”
Rule 3: Bring up succession without sounding like you’re looking at retirement homes.
“Your Board is equally enthusiastic about my successor as CEO, an individual to whom they have had a great deal of exposure and whose managerial and human qualities they admire. (We have two superb back-up candidates as well.) When a transfer of responsibility is required, it will be seamless, and Berkshire’s prospects will remain bright….Do not, however, infer from this discussion that Charlie and I are going anywhere; we continue to be in excellent health, and we love what we do.”
Rule 4: Your shareholders have forgotten all about your business model. Remind them.
“Our insurance operations continued their delivery of costless capital that funds a myriad of other opportunities. This business produces “float”—money that doesn’t belong to us, but that we get to invest for Berkshire’s benefit. And if we pay out less in losses and expenses than we receive in premiums, we additionally earn an underwriting profit, meaning the float costs us less than nothing. Though we are sure to have underwriting losses from time to time, we’ve now had nine consecutive years of underwriting profits, totaling about $17 billion. Over the same nine years our float increased from $41 billion to its current record of $70 billion. Insurance has been good to us.”
Rule 5: Appeal to universal, not personal, greed, because, after all, it is about money.
“We expect the combined earnings of the four [business units]—and their dividends as well—to increase in 2012 and, for that matter, almost every year for a long time to come. A decade from now, our current holdings of the four companies might well account for earnings of $7 billion, of which $2 billion in dividends would come to us.”
Rule 6: If there’s bad news, hit them over the head with it. This way your shareholders won’t have to take notes.
“I’ve run out of good news. Here are some developments that hurt us during 2011: A few years back, I spent about $2 billion buying several bond issues of Energy Future Holdings, an electric utility operation serving portions of Texas. That was a mistake—a big mistake….Last year, I told you that ‘a housing recovery will probably begin within a year or so.’ I was dead wrong.”
Rule 7: Use the specifics of your business to show Wall Street how your performance should be measured.
“Charlie and I measure our performance by the rate of gain in Berkshire’s per-share intrinsic business value. If our gain over time outstrips the performance of the S&P 500, we have earned our paychecks. If it doesn’t, we are overpaid at any price.”
Rule 8: Talk about your team from a shareholder perspective and show why they care as much as the CEO.
“For good reason, I regularly extol the accomplishments of our operating managers. They are truly All-Stars, who run their businesses as if they were the only asset owned by their families. I believe their mindset to be as shareholder-oriented as can be found in the universe of large publicly owned companies. Most have no financial need to work; the joy of hitting business ‘home runs’ means as much to them as their paycheck.”
Even Warren Buffett Needs an Editor
Carol Loomis, a senior editor at Fortune magazine, has edited Warren Buffett’s annual letter to shareholders for more than 30 years. In a recent interview, Loomis said Buffett first approached her about reviewing his letter in 1977. By that time, the CEO of Berkshire Hathaway and Loomis had been friends for at least 10 years. “He trusted me,” she says.
According to Loomis, Buffett had been asked to serve on a study committee by the Securities and Exchange Commission to better understand how to improve shareholder communications and had decided to change the annual report. “I joke that in the first letter I asked him to change an ‘a’ to a ‘the’ and from there it grew,” she recounts. In those days, Buffett handwrote the letter, then his assistant typed it up and overnighted it to Loomis’ home, where she would mark up changes and send it back overnight. (All of Berkshire’s letters are archived on the company’s website.)
Loomis says she doesn’t see a first draft. Buffett probably writes and edits at least a couple of versions of the letter before he sends it to her to read. “I send him my changes, and he either accepts them or he doesn’t. We don’t talk about it or go back and forth on the phone because we both get too angry. But if I feel strongly, I will argue.”
Mostly, Loomis is reviewing for tone and substance. The basis of the relationship, she says, is that “he had a fair amount of trust in me to begin with that has just built up over the years. He knows that I am really interested in making [the letter] as good as it can be—that I have no ulterior motive.” Whenever Loomis writes about Buffett for Fortune, where she has been writer for more than 50 years—as she did recently when it was disclosed that the Oracle of Omaha, as he has become known, has prostate cancer—there is a disclosure that she is both a friend of Buffett’s and a Berkshire Hathaway shareholder.
Are there any usage faux pas that Buffett routinely makes? While describing him as “quick to learn,” Loomis says she kids Buffett that “he missed the class where they taught active verbs,” and that often she has to remove “adjectives that are plowed up in front of a noun.” What they sometimes disagree about is a joke: whether it’s funny or not. In the early days, Buffett pictured that his readership—whom he was writing for—were his two sisters, Bertie and Doris, and presumably they laughed on cue.
In troubled times, readers recognize that Buffett’s letters can be particularly instructive. He doesn’t shy away from the negative. Instead, in his own plain-talking style, as common to his writing as it is when his is being interviewed on stage in front of tens of thousands of shareholders, Buffett lays it on the line. Loomis, who reads annual reports as a matter of course as a business journalist, says most other CE Os simply do not give the exercise the attention it deserves. “They should use their annual report as a means of communicating with their shareholders, and they just don’t,” she says.
A case in point: Two years ago at a dinner, Loomis says she found herself seated next to a CE O who had just taken over a troubled company and was about to write his first annual report letter. He said he wanted to write about the good and the bad, but his public relations people felt otherwise. Loomis says she told him, “You have a chance here to establish your personality with your shareholders. You want to lay it all out there. I know he was convinced, and I waited for his letter. I was disappointed to see that his PR people had won.”
If you contrast Buffett’s with the average CEO annual letter, it will be obvious to most that the majority are written by the public relations department. That’s an acceptable approach. Writing may not be among the CEO’s strong suits. But every writer needs an editor, even if that writer is the CEO of Berkshire Hathaway. —Judy Warner
Two Are Better Than One
Allstate
Letter writers: Thomas J. Wilson, Chairman, President and CEO, and the Board of Directors
Date on letter: April 11, 2012
Length of letter: Wilson: 723 words; directors: 691 words
On the same day that Allstate’s Tom Wilson signed his letter to the shareholders, the Allstate board of directors issued its own letter. The board’s letter thoroughly discusses executive compensation, board effectiveness and the expanded responsibilities of the lead director. Wilson’s letter focused on the company’s commitment to customers and innovation, and offered a bullet list of financial highlights. Having two letters to read offers shareholders the opportunity to see how the messages and goals from the C-Suite and the board align. —Cheryl Soltis Martel
Excerpts From the Chairman’s Letter “Allstate is one of the great ‘main street’ financial institutions in the United States, serving 16 million households. We have maintained this position for more than 80 years by proactively addressing and driving change. In 2011, we continued this legacy by acquiring the capabilities to further execute our strategy while delivering strong underlying financial performance in the face of another year of unprecedented catastrophe losses.
“…Allstate’s strategy is to provide differentiated products to distinct customer segments. Allstate Agencies provide excellent service and a broad array of products to customers who want local advice and differentiated products. The acquisition of Esurance and Answer Financial in 2011 further expanded our capabilities to meet the needs of customers who prefer to handle their own insurance needs. The acquisition makes Allstate the only personal lines company that has unique offerings for all customer segments.
“We also continued to reinvent protection and retirement for the consumer with innovative products. We launched Drive Wise, which is a telematics offering that gives customers discounts based on their actual driving behaviors. Good Hands Roadside, the first pay-as-you-use roadside service, captured 400,000 members. The four-state test of the new Claim Satisfaction Guarantee for auto insurance was successful and led to a national launch early in 2012. We also made progress broadening our relationships with customers by increasing life insurance policies sold through Allstate Agencies in 2011 by 33 percent from the prior year.”
Excerpts From the Board’s Letter “We made changes to our executive compensation program based on stockholder input and discussions with our independent compensation consultant on recent market trends. The changes are designed to further align pay with performance.
“…Reduced Change-in-Control Benefits—We revised our change-in-control arrangements. For senior executives, the new plan eliminates tax gross ups and pension enhancements. Severance benefits were lowered for senior executives, except the CE O. In addition, beginning in 2012, equity awards will have a “double trigger,” which means that they will not vest in the event of a change-in-control, unless also accompanied by a qualifying termination of employment.
“Raised Performance Standards on Long-Term Equity Awards—We changed the mix of long-term equity awards granted to our senior leadership team. For 2012, long-term equity awards consisted of 50% performance stock awards and 50% stock options. Previously this mix was 35% restricted stock units that vested over time and 65% stock options.
“Narrowed the Benchmark Compensation Range—We changed the benchmark target used for total direct compensation to the 50th percentile of the peer group we use for compensation purposes. The benchmark had previously been a range between the 50th and 75th percentiles.
“…Restructured Lead Director Role—We expanded the responsibilities of the lead director and shifted from a model where this responsibility rotated among directors. H. John Riley, Jr. was elected our lead director based on his leadership skills and extensive experience with Allstate.”
Enhancing Fan Affection
The Coca-Cola Co.
Letter writer: Muhtar Kent, Chairman and CEO
Date on letter: April 1, 2012
Length of letter: 1,413 words
Muhtar Kent’s effusive enthusiasm is both palpable and contagious, matched by his knowledge of all facets of the company he has led for the past four years as CEO and three years as chairman. His letter has an entrepreneurial ring, and one gets the message that he is up at dawn and can’t wait to get to work each day. The brand that once taught the world to sing celebrated its 125th anniversary and moved its highly secretive formula to a new vault. He writes that even after three decades in the beverage business he is “amazed and energized by the outpouring of affection for Coke.” Shareholders should be energized as well—Coke increased its annual dividend for a 50th consecutive year. —Judy Warner
“In 2011, we focused on realizing our 2020 Vision—an aggressive but achievable system-wide plan for growth launched at the outset of 2010. How did our efforts measure up against the 6 Ps of our 2020 Vision? Let us take a look at each one: Profit, People, Portfolio, Partners, Planet and Productivity.
“…Coca-Cola and our other brands occupy a unique place in the hearts of people worldwide, and we did not take that position for granted in 2011. Instead, we sought out new and better ways to enhance our fans’ affection for our brands.
“This effort took many forms, from making sure we had compelling marketing and effective merchandizing, to creating memorable moments of connection and fun, to participating in inspiring events.
“For 2011, we ramped up our efforts to win with Coca-Cola, the oxygen of our business. Brand Coca- Cola grew more than 3 percent for the year, adding 350 million incremental unit cases. We also invested in our 14 other billion-dollar brands, including Minute Maid Pulpy, which grew 20 percent by volume in 2011.
“And we introduced more consumers to the wonders of Coca-Cola Freestyle—the innovative new fountain dispenser that delivers more than 125 branded beverage choices with less environmental impact than our traditional legacy equipment.”
Delivering on Commitments
FedEx
Letter writer: Frederick W. Smith, Chairman and CEO
Date on letter: As of May 31, 2011
Length of letter: 808 words
As digital communications expand, the world seems to be shrinking, though physical distribution still faces an inherent distance obstacle. FedEx’s letter demonstrates its dedication to bridging this last barrier to global trade. Fred Smith outlines plans to capitalize on expanding economies while improving on practices in the first world to promote shareholder value, protect the environment and serve an increasingly hyperconnected customer base. —Elizabeth Mullen
“First, we are committed to growing our earnings. We exist to serve our customers and to earn a profit for our shareowners. As we’ve shown with our most recent earnings results, we’re on track to achieve the long-term financial goals to which we’ve adhered for many years: growing our revenue, achieving 10 percent-plus operating margins, improving earnings per share 10 percent to 15 percent, increasing cash flows, and increasing returns on invested capital.
“Second, we intend to improve on our established reputation as an ethical company. We’re dedicated to conducting our business around the world in an honest and forthright way. It starts with our transparency in financial reporting, for which we’ve been recognized consistently. We will continue do the right things for our shareowners, our customers, our team members and the communities we serve. We leveraged our long-standing relationships with humanitarian organizations to deliver critical medical and emergency supplies to Japan following the recent earthquake and tsunami. To support these relief efforts, we committed $1 million in cash and in-kind transportation. Overall in FY11, FedEx donated nearly $5 million in in-kind disaster relief shipping.
“Finally, we’ll reinforce our reputation as a great place to work. Nothing inspires more pride than our team members delivering the Purple Promise— ’I will make every FedEx experience outstanding.’ Because of their relentless dedication, we’re ranked among the Top Ten on Fortune’s World’s Most Admired Companies list and on the Reputation Institute’s list of most admirable U.S. companies.”
Dawn of a New Economic Era
General Electric
Letter writer: Jeffrey R. Immelt, Chairman and CEO
Date on letter: Feb. 24, 2012
Length of letter: 4,768 words
Jeff Immelt’s letter concentrates on the volatility of the economy, drawing the conclusion that this rocky environment may not be a temporary bump in the road, but the new way of doing business. The GE CEO doesn’t shy away from disclosing the negative effect the European economic crisis has had on investor anxiety, and he uses it as an opportunity to highlight the need for strong risk management, liquidity, the willingness to invest and strong people.
Immelt also makes note of four economic interests GE is keeping an eye on: China’s changing growth prospects, the outlook for Europe, how the political winds will affect consumer spending in the United States and whether inflation will derail the recovery. —Cheryl Soltis Martel
“Today, we live in what most business commentators call a volatile world.
“I would argue that when the environment is continuously unstable, it is no longer volatile. Rather, we have entered a new economic era. The emerging economies grow, while the developed world slows. Some of the world’s largest economies face massive fiscal deficits and must deleverage. Interest rates are likely to stay low for extended periods. Material prices are moving higher. There is broad-based social unrest. And, it could remain this way for a long time.
“…I have learned that nothing is certain except for the need to have strong risk management, a lot of cash, the willingness to invest even when the future is unclear, and great people.
“…We live in a tough era in which the public discourse, in general, is negative. I worry that the mood of the times prevents us from moving forward. American companies, particularly big companies, are vilified. There is social unrest in many corners of the world. This should not be a surprise. Our problems are difficult; when economic progress is uneven and unemployment is high, we need to work together to find a better way.
“In these times, it is difficult to explain the benefits of globalization. GE is an infrastructure company. The U.S. is not investing much in infrastructure, but most other countries are. We will sell 140 heavy duty gas turbines in 2012; fewer than five will go to the U.S. So, we must sell in 120 countries; we must build global capability; we must export. In the last decade our exports have more than doubled, creating thousands of high-paying American jobs. We are consistently among America’s top exporters. Are we ‘un-American’ because we sell around the world? No. Our company, because of our great people, can win. And, that is the American spirit.”
Time for a Tune-Up
General Motors
Letter writer: Daniel F. Akerson, Chairman and CEO
Date on letter: As of Dec. 31, 2011
Length of letter: 1,789 words
GM CEO Dan Akerson honestly and gracefully addresses the shareholders of a company slowly recovering from a credit rating a notch below investment grade and working to shake its TARP rescue from the public’s memory. Rather than try to win over investors with hyped-up colorful stories, he allows the company’s recent successes and future projects to send forth a message of renewal. Akerson reminds investors of the strategic principles he has invoked for the company since day one: producing the best vehicles, strengthening the brand’s value, growing profitability globally and maintaining a “fortress balance sheet.” Akerson openly addresses the difficulties the company faces in Europe and South America, lingering pension liabilities and redundancies within the company’s benefit and organizational structure, and provides a realistic plan to overcome these obstacles. —Elizabeth Mullen
“This commitment to peak performance is part of a broader culture change underway at GM—change that goes a long way toward explaining why we accomplished so much in our first full year as a public company.
“Each day the cultural change underway at GM becomes more striking. The old internally focused, consensus-driven and overly complicated GM is being reinvented brick by brick, by truly accountable executives who know how to take calculated risks and lead global teams that are committed to building the best vehicles in the world as efficiently as we can.
“…That’s the crux of our plan. The plan is something we can control. We like the results we’re starting to see and we’re going to stick to it—always. That’s my commitment to you.”
Explaining the Controversial
Google
Letter writers: Larry Page, CEO and Co-founder, and Sergey Brin, Co-founder
Date on letter: April 2012
Length of letter: 1,397 words
“Long term” appears 14 times in the letter to shareholders signed by Google co-founders Larry Page and Sergey Brin. But unlike typical usage, in Google’s case it is the paramount strategic driver. The founders write of wanting the focus to remain squarely on the important things that matter in the world, and when this objective is coupled with their obvious and enduring love for their company, it softens up the shareholders for the elephant in the boardroom—a plan to create a new class of nonvoting capital stock that will enable Page, Brin and Executive Chairman Eric Schmidt to retain majority voting power and, as they write, create technology that enriches millions of people’s lives in deep and meaningful ways and generate significant returns so that Google remains a successful growing business. For current shareholders, this new class of stock represents a two-for-one stock split. The co-founders refer to their first letter eight years before, in which they outlined the decision to create a dual-class governance structure: “We want to ensure that our corporate structure can sustain” long-term development efforts. —Judy Warner
“…Today we announced plans to create a new class of non-voting capital stock, which will be listed on NASDAQ. These shares will be distributed via a stock dividend to all existing stockholders: the owner of each existing share will receive one new share of the non-voting stock, giving investors twice the number of shares they had before. It’s effectively a two-for-one stock split—something many of our investors have long asked us for. These non-voting shares will be available for corporate uses, like equity-based employee compensation, that might otherwise dilute our governance structure.
“We recognize that some people, particularly those who opposed this structure at the start, won’t support this change—and we understand that other companies have been very successful with more traditional governance models. But after careful consideration with our board of directors, we have decided that maintaining this founder-led approach is in the best interests of Google, our shareholders and our users. Having the flexibility to use stock without diluting our structure will help ensure we are set up for success for decades to come.”
Looking Ahead—Always
JPMorgan Chase & Co.
Letter writer: Jamie Dimon, Chairman and CEO
Date on letter: March 30, 2012
Length of letter: 21,687 words
Our definition of financial services is an industry that creates chaos among those who don’t understand it and regret among those who do.
Jamie Dimon’s annual letter is among the most eloquent and insightful of any we reviewed. But simply because JPMorgan’s CEO recognizes the risks inherent in his kind of business does not mean those risks can always be avoided. That is how, despite being the largest, most profitable bank in the United States, the venerable financial institution found itself at the center of a hedging firestorm that included sovereign regulators, the Securities and Exchange Commission and a good deal of unwanted attention from Capitol Hill. But Dimon clearly knows his business better than most and knows how to work through the tempest-tossed seas of global banking. As an annual letter writer, his tone and take are exemplary, and his sharp candor and stunning insights have been noted as superior by no less a critical reader than Warren Buffett.
If there is a moral to the story (other than to avoid the banking industry altogether), it may be that predicting danger and then succumbing to it may still result in investor patience over the long run. People are more inclined to believe in a genius with an experiment that didn’t work out as planned than the fellow who doesn’t even see the big picture until it crashes on his head. Perhaps for this reason, as this issue went to press, JPMorgan’s stock was making a return voyage toward its previous levels. —Jeffrey M. Cunningham
“2011 was another year of challenges for JPMorgan Chase, the financial services industry and the economies of many countries around the world….the frustration with—and hostility toward—our industry continues.
“…Meeting new regulatory requirements will be a large, costly and complex endeavor and we must get it right. It has been estimated that there are 14,000 new regulatory requirements that will be implemented over the next few years. Three hundred out of the 400 Dodd-Frank rules still need to be completed.
“…Over the next few years, we estimate that tens of thousands of our people will work on these changes, of whom 3,000 will be devoted full time to the effort, at a cost of close to $3 billion. We must not let regulatory reform and requirements create excessive bureaucracy and unnecessary permanent costs.
“…For example, different regulators have asked for different reports on some very complex issues such as global liquidity. We are going to try to build one report that meets all their needs and ours, too— as opposed to preparing three completely different liquidity reports every day or every month. Three reports lead to more mistakes, less understanding and more work.
“…We operate in a complex business with high and increasing regulatory demands and risk. Whether or not we agree with all the new rules and business processes, we want you to know that we will strive to meet or exceed every regulatory requirement around the world. This simply is the way we run our business.
“While we agree with much of the reform that has been put in place, we do not agree with all of it. As a result of Dodd-Frank, we now have multiple regulatory agencies with overlapping rules and oversight responsibilities. Although the FSOC was created, it is proving to be too weak to effectively manage the overlap and complexity.
“…We do not disagree with the intent of the Volcker Rule….If the intent of the Volcker Rule was to eliminate pure proprietary trading and to ensure that market making is done in a way that won’t jeopardize a financial institution, we agree.
“…And most banks that have gone bankrupt did so by making bad loans—not by trading. In any case, we are well-positioned to be a winner in the investment banking business. While we do believe that there will be some large-scale changes affecting the business—driven by both regulation and innovation— J.P. Morgan has the breadth—we are one of the top players in almost all of the markets that we deal in—and necessary economies of scale to emerge as a winner.”
Walton Family Vision Endures
Walmart
Letter writer: Robert Walton, Chairman
Date on letter: As of Jan. 31, 2012
Length of letter: 613 words
Chairman’s Letter: Few companies take the time to substantively mention their board and corporate governance in their annual letter. Employees, customers, even government all get kudos, but the board appears to be off in the wings. Not so at Walmart, where Chairman (and major shareholder) Rob Walton takes the board’s role seriously. In his annual letter, Walton emphasizes the board’s role in overseeing the retail empire developed by his father, company founder Sam Walton, and provides detail into new practices adopted by the board. No doubt some people will challenge this assumption after the recent problems in Mexico. But having the founder’s son and chairman assure shareholders of the board’s commitment to good corporate governance ensures that the problems will not only be carefully investigated but their reoccurrence minimized. —Jeffrey M. Cunningham
“Dad never wavered in his belief that integrity was essential. ‘Personal and moral integrity is one of our basic fundamentals, and it has to start with each of us,’ he said. With culture and values like these, there is no limit to the difference Walmart associates can make for shareholders and customers and the world we serve around us.
“We also are proud of the service of our board members, and of the processes we have in place to serve our shareholders. Good corporate governance is good business. As your chairman, I am pleased that we continue to strengthen our structure and best practices.
“We recognize the importance of board independence. We separated the roles of board chairman and chief executive officer nearly 25 years ago in 1988, when Dad became chairman and David Glass chief executive officer. This decision promoted even greater accountability and responsibility.
“Ten of our current board members are independent, and we have an independent presiding director. All directors must stand for election each year and receive majority votes. Based on the board’s recommendation, we provide shareholders with an annual ‘say-on-pay’ vote, which received overwhelming shareholder approval last year.
“We added an additional board meeting to the 2012 calendar to provide more face-to-face time with management. Last year, in fact, we had an attendance rate at board, committee and shareholders’ meetings of 98 percent, an extraordinary measure of our directors’ dedication.
“We also added a Technology and eCommerce Committee last year to bring more intensive company focus on Global eCommerce and social and mobile retailing. We are leveraging the knowledge and insights of directors who have deep experience and high expectations in this area.”
CD&A Stands for ‘Crisis Discussion And Analysis’
News Corp.
Letter writer: Rupert Murdoch, Chairman and CEO
Date on letter: As of June 30, 2011
Length of letter: 2,591 words
“I have always said that the News Corporation ethos is to see opportunity where others see only challenge.” Instead, in 2012, Murdoch found challenge where the media found opportunity. After a fiveyear investigation by Scotland Yard and Parliament, News Corp.’s CEO was dragged through public hearings for phone hacking incidents that occurred as many as 10 years ago. Heaps of blame and shame were cast, mea culpas offered repeatedly, serial resignations followed by more investigations and inquiries, a pie in the face, the folding of News of the World, the departure of top editor Rebekah Brooks (now facing criminal charges), and then watching his son, his one-time presumed heir apparent, undergo withering rounds of questioning.
The 81-year-old patriarchal chieftain understood he needed to show the public his conviction and his moral compass in order to right the ship: “Frankly, I am the best person to clean this up.” How does a CEO deal with such storm-tossed waves of bad news in an annual letter? Directly, forcefully, but all the while placing it within the logical confines of his company’s enormous global media business. —Jeffrey M. Cunningham
“As has been widely publicized, our Company has received a major black eye from the phone hacking scandal at our News of the World newspaper in the U.K. As I said at a Parliamentary hearing, this episode has been the most humbling of my career.
“Let me be clear: the behavior carried out by some employees of News of the World is unacceptable and does not represent who we are as a Company. It went against everything that I stand for. That behavior betrayed not only our readers, but also the many thousands of magnificent professionals in every one of our other divisions around the world. It was a painful decision to shut down the News of the World, but it was the right thing to do.
“…As I write this letter, our Board of Directors and senior management are acting decisively to get to the bottom of what happened. I have asked Joel Klein, who formerly served in the U.S. Justice Department, to lead our efforts in this matter. He reports to independent director Viet Dinh, who in turn is having regular meetings with all the other independent directors. The Board of Directors and the Company have retained independent counsel, and we are cooperating with the relevant authorities in both the U.K. and the U.S. In sum, we have taken decisive actions to hold people accountable— and we will do whatever is necessary to prevent something like this from ever occurring again. We will put things right.
“Notwithstanding the difficult chapter represented by News of the World, I wish to reiterate my enthusiasm for where News Corporation is today and where we are going. I realize the current flavor of the day is economic pessimism, and it is clear that Europe in particular is in the midst of a period of extreme volatility. However, I am optimistic about the future because I believe that News Corporation—the most global of media companies with the most compelling content— will continue to shape it. We are better positioned financially and operationally than we have ever been. Our culture is, and always has been, entrepreneurial. As we proved this past year, News Corporation is not the kind of company—and we are not the kind of people—to fear a changing market.
“Across the world, our 51,000 employees are working every day to discover new and profitable ways to create and deliver our content for the benefit of our stockholders and global viewers and readers. That means looking for—and delivering— the inventive solution where others simply throw up their hands in despair. Every day some new technology up-ends somebody’s old established business model. Our people recognize that as an opportunity.”
Innovation Drives Giving and Guidance
Bill & Melinda Gates Foundation
Letter writer: Bill Gates, Co-chair
Date on letter: January 2012
Length of letter: 8,391 words
Bill Gates wants to change the world. For the second time.
Instead of developing software, this time he wants to cure polio, AIDS, world hunger, illiteracy and contagious infections through family planning, education and philanthropy. To fulfill this mission, the foundation Gates created with his wife, Melinda, has created “the giving pledge.” The pledge requires that wealthy people give away the majority of their wealth during their lifetime. In effect, Gates has become a one-man estate planner for the likes of himself, Warren Buffett, Mark Zuckerberg and a number of other billionaires.
Bill and Melinda Gates traveled with Buffett to India, where they spoke to wealthy industrialists and entrepreneurs about doing this type of giving in their own country and the impact that it could have on the economy. Buffett used the example of Santa Claus requiring the assistance of elves to do his good works, and thus helping to create employment. It may be a stretch, but who wants to argue publicly against Santa? —Jeffrey M. Cunningham
“ …The world faces a clear choice. If we invest relatively modest amounts, many more poor farmers will be able to feed their families. If we don’t, one in seven people will continue living needlessly on the edge of starvation. My annual letter this year is an argument for making the choice to keep on helping extremely poor people build self-sufficiency.
“My concern is not only about farming; it applies to all the areas of global development and global health in which we work. Using the latest tools— seeds, vaccines, AIDS drugs, and contraceptives, for example—we have made impressive progress. However, if we don’t make these success stories widely known, we won’t generate the funding commitments needed to maintain progress and save lives. At stake are the future prospects of one billion human beings.
“…The Giving Pledge, which entails wealthy individuals and families making a simple pledge to give away a majority of their wealth during their lifetime or in their will, has already grown to 69 people, which is more than we expected when we started. As we began 2012, we heard from several people who said they plan to take the pledge very soon. We’re hopeful that many others will follow. It’s inspiring to read people’s rationale for making the pledge; you can find their letters at www.givingpledge.org.
“We brought the group of pledgers together in May for the first of what will be an annual gathering to learn from each other. The event was a great success. A lot of people found they had goals in common, so even as the Giving Pledge celebrates the diversity of giving, it has helped spur collaboration. We’re starting to see the fruits of that effort, as members of the group are now looking at cofunding projects.
“….Unfortunately, many people believe the opposite—that money spent on development is wasted, or that it doesn’t get lasting results. Melinda and I will spend a lot of time in the coming year explaining why they’re mistaken. The relatively small amount of money invested in development has changed the future prospects of billions of people—and it can do the same for billions more if we make the choice to continue investing in innovation. We will repeat that message over and over in our speeches and interviews, and on gatesfoundation.org and gatesnotes.com, because we are convinced that when people hear stories of the lives they’ve helped to improve, they want to do more, not less.”
Special Circumstances
A Change in Strategic Direction
Abbott Laboratories
Letter writer: Miles D. White, Chairman and CEO
Date on letter: March 2, 2012
Length of letter: 2,120 words
Abbott’s shareholder letter serves as both a report on the company’s recent performance and a road map for the spin-off of a research-based pharmaceutical company, along with an introduction to its strategy and leadership team and a detailed explanation for how this transition will best serve shareholders. Miles White acknowledges that the future board will be instrumental in driving the company’s success— a unique nod to boards’ importance not represented in many investor letters. — Elizabeth Mullen
“…Our strategic actions of the past decade-plus have dramatically reshaped and strengthened Abbott. Most recently, we have expanded our presence in emerging markets and aggressively rebuilt our pharmaceutical pipeline. At the same time, the investment identities and operating models of our current medical products businesses and pharmaceuticals business evolved independently. They now represent two distinct and compelling investment opportunities for shareholders.
“…This period also saw significant change in our operating environment, including the rise of emerging markets and their growing impact on global business. Abbott’s sales outside the United States now exceed those within. At the same time, rising global regulatory standards have changed the landscape for new healthcare products.
“…These changes in the environment essentially led each business to pursue distinctly different business models. Today, research-based pharmaceutical products have different approval and life cycles, research and development profiles, regulatory environments and geographical market focuses than our other businesses.
“…As a result, these two halves of today’s Abbott have moved in very different directions with equally different demands and priorities and are already functioning as separate, highly successful businesses. Acknowledging this, with the creation of two independent companies, helps clarify for investors each business’ value, which we believe will be beneficial for both companies and both stocks.
“In making this decision, we challenged ourselves to think beyond our established and successful model to create the optimal pharmaceutical and medical products companies for the conditions of the 21st century. Because of the ways in which investors value these two different models, and because of their varying capital and investment needs, we concluded that we would be even more successful in the years ahead as two companies rather than one.”
Detailing the Power of Invention
Amazon
Letter writer: Jeffrey P. Bezos, Founder and CEO
Date on letter: April 13, 2012
Length of letter: 3,593 words, including the first shareholder letter from 1997
The cheerleading you hear for Amazon is from the C-suite, where founder Jeff Bezos relies on a triedand- true approach to salesmanship. In the first half of his letter, Bezos lets satisfied customers extol the benefits of Amazon products such as Amazon Web Services, Kindle Direct Publishing and Fulfillment by Amazon. Testimonials are followed by his own detailed analysis of the company’s conditions and prospects. In addition, Bezos attaches his 1997 letter to shareholders as a reminder that the objectives set out by him then remain today. —Judy Warner
“…Invention comes in many forms and at many scales. The most radical and transformative of inventions are often those that empower others to unleash their creativity— to pursue their dreams. That’s a big part of what’s going on with Amazon Web Services, Fulfillment by Amazon, and Kindle Direct Publishing. With AWS, FBA, and KDP , we are creating powerful self-service platforms that allow thousands of people to boldly experiment and accomplish things that would otherwise be impossible or impractical. These innovative, largescale platforms are not zero-sum—they create win-win situations and create significant value for developers, entrepreneurs, customers, authors, and readers.
“Amazon Web Services has grown to have thirty different services and thousands of large and small businesses and individual developers as customers. One of the first AWS offerings, the Simple Storage Service, or S3, now holds over 900 billion data objects, with more than a billion new objects being added every day. S3 routinely handles more than 500,000 transactions per second and has peaked at close to a million transactions per second. All AWS services are pay-as-you-go and radically transform capital expense into a variable cost. AWS is self-service: you don’t need to negotiate a contract or engage with a salesperson—you can just read the online documentation and get started. AWS services are elastic—they easily scale up and easily scale down.
“…I am emphasizing the self-service nature of these platforms because it’s important for a reason I think is somewhat non-obvious: even well-meaning gatekeepers slow innovation. When a platform is self-service, even the improbable ideas can get tried, because there’s no expert gatekeeper ready to say ‘that will never work!’ And guess what— many of those improbable ideas do work, and society is the beneficiary of that diversity.”
Jung’s Last Stand
Avon
Letter writer: Andrea Jung, Former CEO and now Chairman
Date on letter: March 2012
Length of letter: 1,153 words
After 12 years at the helm, Andrea Jung turns the annual shareholder letter into a candid request for investor patience, writing that a new CEO—unnamed at the time the letter was published—would address challenges that have slowed recent revenue growth. Few CEOs would have the courage and candor to confess that a company’s challenges have grown so complex they require fresh thinking, and withstand the urge to hypothesize about them or simply blame them on the larger global slowdown. While acknowledging the search for a successor, Jung writes that any major, long-term decisions will be delayed until the new CEO is on board. Not all was doom and gloom, however. Jung predicted that the launch of a new product line would become one of the largest in Avon’s history. —Judy Warner
“…Looking ahead to 2012, we are moving forward with urgency to get the company back on a growth track as quickly as we can. In line with this, we have undertaken a full long-range operational and financial review of the business, evaluating all external and internal factors that are impacting our performance. While we’re delaying any major, long-term strategic decisions until a new CE O is on board, we are taking immediate actions to reignite direct-selling momentum; cut costs; strengthen cash flow; and improve overall operating and management effectiveness.
“By far our most critical priority is to accelerate top-line revenue growth. In 2011, we saw strong direct- selling performances in a number of key markets, most notably Mexico, where we delivered double-digit growth and gained share against our competitors. Our focus now is on driving similar success in our other top markets. In the U.S., for example, we are seeing some early encouraging signs of progress, with gains in mass market Beauty share this last fourth quarter for the first time in three years.”
New Beginnings
Exelon
Letter writer: John W. Rowe, Chairman and CEO
Date on letter: Feb. 22, 2012
Length of letter: 1,380 words
The public utility company’s letter comes on the heels of a merger with Constellation Energy in 2011 and is authored by a chairman and CEO who is set to retire in 2012 after 11 years at the helm. John Rowe’s letter to shareholders demonstrates management’s commitment to the company and highlights how Exelon subsidiaries PECO and ComEd weathered storms, hurricanes and snow in a slow economy. —Cheryl Soltis Martel
“…Exelon believes in market-based solutions to energy supply issues. Much of Exelon’s competitive advantage and underlying value rests on the principles of competitive markets and clean energy.
“We continued to advocate in state and federal jurisdictions for competitive markets. Properly regulated open markets, shaped by customer choice and accurate price signals, will promote a clean, reliable energy supply. Our involvement in the Ohio competitive market settlements in 2011 will help open markets for us.
“…Our largest growth initiative of 2011 is, of course, the merger with Constellation. It will create the largest competitive integrated energy provider in the country, bringing together complementary businesses into a solid platform. The combination aligns Exelon’s large, clean generating fleet with Constellation’s leading commercial business, providing a larger retail channel-to-market and capturing the advantages of scale in both operations and economics.”
Confronting a Difficult Past
Hewlett-Packard
Letter writer: Meg Whitman, CEO
Date on letter: As of Oct. 31, 2011
Length of letter: 1,703 words
Writing a letter to shareholders for the first time as a new CEO can be daunting, but when a company has faced a scandal, resignation, as well as an unpredictable economic recovery, stiff competition and natural disasters, it may seem downright terrifying. Meg Whitman steps up to the plate with confidence, addressing the company’s obstacles directly and immediately, and avoids glossing over what she admits is less-than-stellar financial performance. She acknowledges that HP failed to “clearly articulate our direction” when it came to announcing changes within the company, including the acquisition of software company Autonomy.
While explaining that the 2011 financial results were a mixed bag, Whitman also emphasizes the core of the HP brand as “the world’s largest provider of information technology infrastructure, software, services, and solutions to individuals and organizations of all sizes.”
Ultimately, her letter carries the ring of truth and optimism—that times may be tough, but better days for HP lie ahead. — Elizabeth Mullen
“…While I’d like to say that we’re through the tough times, many of the fiscal 2011 headwinds are still with us as we enter fiscal 2012, and our near-term focus is on stabilizing the business. I’ve characterized 2012 as a rebuilding year in which we will be doing the hard work that will position us to pursue consistent, profitable, long-term growth. We expect that focusing on the fundamentals and building a stable platform will drive revenue and earnings growth for years to come.
“Over the long term, I expect HP to be a GDP – type growth company that can grow revenue inline with or better than our markets, expand earnings faster than revenue and produce consistent cash flow. We intend to deploy a balanced capital allocation strategy, investing in our businesses through a combination of capital expenditures and acquisitions, and returning cash to stockholders through a mix of share repurchases and dividends.”
IPO Fast Lane
Zipcar
Letter writer: Scott Griffith, Chairman and CEO
Date on letter: As of Dec. 31, 2011
Length of letter: 2,352 words
As if running an Internet company is not enough of a thrill, having several billionaires on your board—Meg Whitman, Steve Case and Bob Kagle—can’t be an easy audience for a PowerPoint presentation. The implosion of the Groupon and Facebook IPOs should concentrate the mind of the average CEO even further. Yet Scott Griffith is no average CEO.
Despite the challenges of managing as dynamic a company as Zipcar, even with the competitive pressures building up from Hertz’s new car-sharing service, he manages to find the right tone of awe, dependability and innovation that makes a young Internet company seem like a long-term player, exciting to its engineers and capable to its shareholders. —Jeffrey M. Cunningham
“…With our compelling ‘Wheels When You Want Them’ value proposition, Zipcar offers on-demand, self-service access to a network of vehicles where and when people need them without the costs and hassles of ownership. In addition to the savings we provide to our members— an average of $600 per month—we provide a significant environmental benefit, with every Zipcar taking 15 personally owned vehicles off the road. Moreover, our members tend to drive less by making their transportation choices by the trip, relying on a mix of options including Zipcar, walking, taxis, biking and public transit.
“…In the new world of urban mobility, we envision a future where car sharing members outnumber car owners in major cities around the globe. That may be a bold statement, but we see it as only a matter of time. We estimate the addressable global market for car sharing to be over $10 billion and we believe car sharing is still in the very early stages of adoption, even in our largest existing markets.
“…As we do this, we see the world rapidly moving in the direction of the vision we articulated many years ago, thanks to compelling and favorable trends in consumer behavior, technology and government policy.”