Cultivating shareholder loyalty: the annual report by nbutensky



                                                           numbeR 5
                                                                      Where are individual
                                                                      shareholders when
                                                                      we need them?

shareholder                                                           Why storytelling
                                                                      counts more

                                                                      than ever

                                                                      Implications of
                                                                      notice and access

the annual report                                                     Elements of a
                                                                      memorable annual,
                                                                      10K wrap or
                                                                      HTML report

A n e d u cAt I O n A l S u p p l e m e n t tO I R m AgA z I n e
                                      A changing
loyalty counts                                      s anyone who owns a                                               shareholders, investors, employees,
                                                    BlackBerry, laptop or cell                                        suppliers, analysts, buy-side portfolio
One catchphrase spawned by the                      phone knows, the opportu-                                         managers and the media.
internet age is ‘sticky eyeballs’,                  nities for communicating
referring to users who spend                        24/7 have exploded. Even                                          Notice and access
a long time on a website and          so, for public companies eager to tell                                          On July 1, 2007 the SEC gave public
repeatedly return. Just as internet   their stories to investors, the range of                                        companies a new alternative for
content providers want to cultivate   communications media doesn’t always                                             delivering annual reports and proxy
sticky eyeballs, public companies     feel like particularly good news.                                               materials when it enacted its notice
should woo their equivalent:             That’s because everyone – from                                               and access rules. Traditionally,
long-term investors.                  financial consultants, Wall Street                                              companies have delivered annuals
                                      analysts and bankers to the financial                                           and proxy documents 25-30 days prior
For decades now, the investment       media and bloggers – is vying for                                               to the shareholder meeting. Under
world has understood the value        investors’ attention. In such a highly                                          the new rules, public companies have
of shareholders who aren’t            fragmented environment, it’s easy                                               the option to post proxy materials on
scared off by short-term volatility   for investors to become overwhelmed                                             a website after sending a notice of
and who take a long view in their     and your message to get lost.                                                   internet availability of proxy materials
investments. It’s these share-           Many IROs realize the annual report                                          to shareholders at least 40 days prior
holders that bolster your stock       remains a tremendous opportunity                                                to the annual meeting.
price when the hedge funds            to cut through the noise. As the SEC                                                A stated goal of the SEC’s notice and
short you or Wall Street analysts     and other regulators demand greater                                             access rule is to lower costs for public
downgrade your stock.                 transparency, the annual report                                                 companies that send printed annual
                                      remains the only mandatory document                                             reports and proxies to shareholders.
Although internet penetration is      in which companies have the latitude                                            The extent of the cost saving remains
high in the US, your shareholders     to editorialize and shape their                                                 to be seen, however. Companies are
may not fall within the tech-sav-     message for their key audiences:                                                still obliged to mail a paper annual,
viest of demographics. Companies
with a high percentage of older        Companies need the retail vote
investors know paper remains the
                                                                     Without notice             With notice
preferred way of researching a                                100%    and access                and access

company, as do companies with                                 80%                                                                                                  80%
a large international base. Also,
                                                              60%                                                                                                  60%
                                                                                                                                                                          Retail shares voted (%)

online annuals may be lost on
                                         Average quorum (%)

                                                                                                                       Without notice
overseas investors, which don’t                               40%                                                       and access
                                                                                                                                                  With notice
                                                                                                                                                                                                    Source: Broadridge

always have access to sufficiently                            20%
                                                                                                                                                  and access       20%

high-speed connections to read                                          90.17%                     87.79%                 34.29%                     15.83%
                                                                 0                                                                                                 0
lengthy documents online.                                            Beneficial shares processed by Broadridge.          As a percentage of total retail shares.
                                                                       Includes the broker vote. Averages are            Excludes e-delivery and broker votes.
                                                                      calculated on the basis of each meeting.

5.ii                       IR guide                                                                           Cultivating shareholder loyalty: the annual report
 A cover can say it all                                                                     think votes
   the slot machine imagery immediately grabs                                               Nowadays investors are more
   the reader’s attention; the tagline ‘building on
                                                                                            empowered than ever to
   growth and success’ sets the tone for the story
   WmS tells inside.                                                                        register their displeasure with
                                                                                            management, so almost every
                                                                                            public company is interested in
free of charge, to anyone who requests                                                      bolstering shareholder support.
a copy. What’s more, once a shareholder           compelling investment case in an          If management fails to get a
indicates a preference for paper, that            eye-catching format.                      majority on a controversial
preference must be honored until                      Curran & Connors, an annual           shareholder proposal, it might
further notice is given.                          report designer, studied the behavior     find itself having to make some
    In addition, Broadridge Financial             of the 100 largest public companies       unwelcome changes.
Solutions, formerly ADP, holds a                  with fiscal years ending in December
virtual monopoly over the proxy and               2007. These were among the first to be    Companies facing a controversial
annual report delivery business; its              given the option of using notice and      shareholder proposal or a difficult
fees remain an expense companies                  access. Of the 100, 36 percent did        proxy fight should think twice
simply can’t get around.                          traditional annual reports, 17 percent    before embracing e-delivery.
    If cost saving is the goal, meaningful        produced summary annuals, 41              There are signs that notice and
reductions are most likely to be                  percent chose 10K wraps and only 6        access dampens voter turnout:
achieved by large companies with                  percent produced a 10K exclusively,       analyzing results from the first
diverse shareholder bases that                    eliminating any and all narrative. In     year of operation, Broadridge found
previously printed astronomical                   other words, the vast majority of large   the retail vote from beneficial
numbers of annuals. Middle-market                 public companies continued to write,      shareholders was 16.44 percent
companies – with more modest                      design and publish annual reports.        for companies once notice and
distribution in the first place – will                Regulators have never required a      access was used, compared with
likely see far less dramatic savings,             large, glossy annual report per se, but   34.3 percent the year before.
if any savings at all.                            the annual report has been, and still
    As of May 31, 2008, 634 corporate             is, a necessary piece of investor         Even companies without a critical
issuers out of an investment universe             communication. In 2005 Rivel Research     vote on the proxy should consider
of more than 10,000 public companies              Group found 64 percent of buy-side        how to treat shareholders to
had chosen notice and access, but                 analysts and portfolio managers           garner necessary support when
many major companies with enormous                identified the annual report as one of    they need it. Companies that don’t
shareholder bases have shied away                 the most helpful sources of information   build goodwill with shareholders
from e-delivery. Apparently they have             around. Notice and access hasn’t          today may find shareholders
decided the potential savings on print            changed that. Today, most public          aren’t receptive when the com-
and postage are outweighed by the                 companies produce an impressive           pany finally needs their backing.
opportunity cost of failing to commu-             annual report for the simple reason
nicate with shareholders that desire a            that it’s the right thing to do.

Cultivating shareholder loyalty: the annual report                                          IR guide                     5.iii
                                      Making your
                                      story sing
the big picture                                    uring the 1980s and 1990s,         What questions do IROs repeatedly get
                                                   annual reports functioned          asked? And are there any misconcep-
Companies that interpreted the                     as grand tours: lengthy            tions we could potentially clear up by
SEC’s new notice and access rules                  and sometimes tedious              using this very public platform?
as a chance to simply provide a                    accountings of all the                 Savvy IROs know the annual report
10K and forego the traditional        assets and impressive aspects of a              is far more than a regulatory obligation.
annual report weren’t necessarily     company. Those days are gone. First             It’s a chance to advance their standing
tuning in to SEC chairman             and foremost, today’s annual report             with shareholders now and in the
Christopher Cox’s full message.       tells a story, making a compelling              future. The best annual reports
                                      case for why investors should choose            communicate value drivers, explaining
In an October 12, 2007 speech at      to invest in one company over another.          where a company has been, what it’s
the Center for Plain Language             For IROs who want to create an              doing today and where it hopes to be
symposium, Cox said: ‘The visual      outstanding annual report, the central          within the next three to five years.
presentation of quantitative          question is: what’s our strategy? In
information is also enormously        2006 NIRI found that 86 percent of              Project management
important in getting the compen-      companies publishing a traditional              Establishing a rough timeline for the
sation message across to investors    annual report and 83 percent publishing         annual is one of the very first steps to
clearly and understandably. By        a 10K wrap described communicating              take. All materials need to be complete
organizing data in tables, graphs     the company’s corporate strategy as             and in the hands of shareholders
and pictures, companies can help      their main objective.                           25–30 days before your annual
the reader to grasp more easily the       Candidly answering a few questions          meeting. If you’re using e-delivery, add
key aspects of what might other-      is an excellent starting point. What do         an extra 15–20 days to the process so
wise be just a jumble of numbers.’    we hope to accomplish with the annual           everything’s wrapped up at least 40
                                      report? What things don’t investors             days before the meeting. Generally
Some companies are using notice       know about us that they should know?            speaking, a good annual report takes
and access to send print annuals
to only their largest shareholders,    Charts can be fun
but this leaves out significant
                                        by placing its trademark hot dog atop each bar of its financial charts, nathan’s
shareholders with hundreds of
                                        demonstrates its strong results in a lighthearted way in its annual report.
thousands of dollars’ worth of
shares. Many savvy IROs think
these are the very shareholders
they most want to reach: loyal
investors with holdings large
enough to make a difference.

5.iv                       IR guide                                           Cultivating shareholder loyalty: the annual report
 Let your personality shine                                                               can you be too creative?
  capital city bank group updated the standard,
                                                                                          The most creative designs send a
  stodgy director photos by showing the entire board
  without a single necktie in sight. the informal pose                                    message or emphasize a particular
  was consistent with the annual report’s emphasis                                        point. Creativity for creativity’s
  on people: from clients to associates, shareholders                                     sake alone can be a turn-off.
  and the community at large.
                                                                                          The best annual report designers
four months to produce, so count back           beyond mere legal boilerplate. A good     know it’s important to be practi-
five to five and a half months from the         MD&A is candid and honestly assesses      cal. Creating a book that’s
annual meeting date to calculate a              the business environment, potential       oversized might get your annual
kick-off date.                                  risks and rewards. Here are some          report noticed in the wrong way.
    Next, select a project leader who           other considerations:                     Studies have shown institutional
will solicit feedback from many                    Think brand. The annual report         investors and retail shareholders
different individuals and assume                should be an extension of your            like to store annual reports in
ultimate responsibility for the final           corporate identity. Maintaining the       filing cabinets. A document that
product. Some companies write the               same colors, themes and images            won’t fit anywhere might get
annual report internally; others hire a         throughout all publications will help     thrown away.
professional writer. Lining up this key         strengthen your message.
individual early makes sense.                      Tell the bad with the good. ‘And       On the other hand, creativity that
    Finally, you should select a                now it’s confession time,’ writes         underscores your identity makes
designer and printer well before the            Warren Buffett in his 2007 letter to      a strong impression. American
project gets underway. Increasingly,            Berkshire Hathaway shareholders.          Vanguard, an agricultural company,
companies prefer to hire designers              This remarkably candid sentence           included a card embedded with
who can produce annuals for both                leads into a detailed discussion of the   seeds in its 2007 annual report.
print and online audiences. Your                good acquisitions he almost flubbed       Shareholders were instructed to
annual report team will work closely            and the poor ones he made.                place the card in the earth and
with a designer, so be sure to trust               Make the shareholder letter            then watch a plant grow. This
your gut and hire someone who will              compelling. Your CEO may not be able      novel giveaway was perfectly
make a stressful time a little less             to approximate Buffett’s folksy charm     attuned to the strategy and
angst-inducing.                                 and plain-spoken wisdom, but his or       vision of the firm; it also gave
                                                her personality should come through.      shareholders a lasting reminder
Details count                                      Make it scannable. Few if any          of American Vanguard’s message.
The SEC requires that annual reports            shareholders read the annual cover
include a corporate profile, financial          to cover. Make sure there’s plenty of
data and a management discussion                white space, pull quotes and other
and analysis (MD&A). Over the past              reader-friendly details so investors
five years, regulators have pushed              can get the gist of your message by
public companies to move the MD&A               scanning the annual.

Cultivating shareholder loyalty: the annual report                                        IR guide                      5.v
                                        formats abound

XbRl approaches                                    ar too much time has been           What’s new online?
                                                   wasted arguing whether 10K          Denny’s, the restaurant chain, has
XBRL, an interactive data-tagging                  wraps spell the demise of           captured attention with its online
system for financial information,                  the traditional annual. Some        annual, which has a remarkably
could soon be mandatory for                        of the best 10K wraps have          consistent look and feel in print
all public companies in the US.         narrative and editorial sections that are      and on a computer screen.
On May 14 the SEC approved a            every bit as hard-hitting, provocative            For most companies, the online
proposed rule that would require        and detailed as traditional annual             annual report hasn’t been a budget-
the 500 largest US-listed compa-        reports. In fact, annual reports and           buster. A few years ago, in fact, NIRI
nies to begin filing data in the        10K wraps are really the same animal.          found that 86 percent of all online
XBRL format in early 2009 and           The only difference is how the company         annuals cost under $20,000 to
all public companies to follow          in question chooses to present its             produce. Although a handful of
suit within three years.                financial information.                         companies have clearly innovated
                                            Portfolio Recovery Associates is           online, most are spending modestly.
Interactive data tags uniquely          a case in point. In 2007 this Norfolk,            But while the online annual hasn’t
identify individual items in a firm’s   Virginia-based portfolio management            proven terribly expensive, its critics
financial statement, allowing the       company chose to do a 10K wrap.                would say it’s not particularly effective,
information to be easily searched       Before reaching the 10K, however, the          either. Too often, the printed annual is
for on the internet and downloaded      readers see 16 pages of glossy photos
into electronic spreadsheets.           and narrative, including a shareholder          Think flexibility
                                        letter, a colorful depiction of some
Although the benefits of XBRL           financial results – such as total
are impressive, companies have          revenue and net income – and a
been slow to adopt the system           detailed description of the business.
on a purely voluntary basis. As             Another approach is to provide the
encouragement, the SEC is giving        10K within a folder, giving it a longer
public companies a 30-day grace         shelf life as a corporate brochure
period for initial filings so they      or business summary. That’s what
can ‘tag’ data after the traditional    the Medicines Company did in 2007 –
reports are filed.                      it, too, provided several pages of
                                        commentary up front.
At its open meeting, the SEC noted          Some companies that set out to
that the average price for XBRL         save money by avoiding traditional
conversion in a pilot program was       annual reports are unpleasantly
approximately $30,000 and that          surprised by the printing and mailing
                                                                                          by placing the 10K within a folder,
such conversions required roughly       costs for the 10K. Because the typical            a company can use the outside
40 hours of work.                       10K has far more pages than most                  photos and copy as a kind of
                                        typeset financials, fulfillment can               corporate brochure.
                                        prove more expensive, not less.                         IR guide                                          Cultivating shareholder loyalty: the annual report
 Be creative                                                                               Walking the talk
   diversified energy company delek put its 10K on a flash drive that it distributed to    Companies are looking for ways
   investors and other interested parties along with its summary annual report. this
                                                                                           to talk about the environment
   attention-getting giveaway underscores the company’s forward-looking strategy.
                                                                                           and sustainability in language
                                                                                           that doesn’t sound hopelessly
                                                                                           fluffy. One way to do this is
                                                                                           through the paper you select
                                                                                           for your annual report.

                                                                                           The Forest Stewardship Council
                                                                                           (FSC), an independent, non-profit
                                                                                           organization, certifies sources
                                                                                           of pulp or paper to say whether
                                                                                           they’ve been produced in an
                                                                                           environmentally responsible
                                                                                           manner. Using FSC-certified
                                                                                           paper in your annual report is
                                                                                           one way to demonstrate that
                                                                                           your actions match your words.

designed and produced first and then             of companies providing a full HTML        Some annual reports even say
converted into an online version. The            version has increased to 46 percent       how many trees have been saved
problem is that this process doesn’t             from 32 percent, but even then the        through using environmentally
exploit the enormous possibilities of            features are rarely cutting edge,         sound paper. Mohawk Fine
the internet. It would be far better to          Radley Yeldar found. In fact, just 11     Papers has estimated that if
develop the print and online versions            percent of FTSE 100 firms include         100,000 copies of a typical 10K
in tandem so that interactive capabili-          multimedia content such as video          are printed on FSC-certified
ties could be considered from the very           statements or audio files in their        papers, the environmental
beginning. Whether you do a full-blown           online annuals, while only 5 percent      benefits are the same as
HTML version or a straightforward                provide interactive charts or diagrams.   cutting down 170 fewer trees.
PDF, the internet version should be                 What investors really want online –
in your thoughts from day one.                   as well as off-line – is to learn         Safeway, Medtronic, Regency
    Many experts believe online                  management’s vision for the future.       Centers and Pulte Homes
annuals have yet to come into their              Above all, it’s important to consider     are all firms that have printed
own. In 2008 London-based Radley                 the online annual strategically. Make     their annual reports on FSC-
Yeldar found 19 percent of companies             sure that whatever you want to            certified paper.
in the FTSE 100 still provide their              communicate is as apparent online
online report only in PDF. The number            as it is on the page.

Cultivating shareholder loyalty: the annual report                                         IR guide                     5.vii

Sponsor’s statement                                  ne way to make an                  GRI found that readers appreciate a
                                                     impression with today’s         balanced story. ‘Openness in disclosing
Curran & Connors is an award-                        shareholders is by              economic, environmental and social
winning graphic design firm                          demonstrating a commit-         impacts can give companies a
specializing in the design and                       ment to the environment,        competitive edge, but people aren’t
production of annual reports,           the community in which you operate           fools,’ says Ernst Ligteringen, GRI’s
corporate literature and interactive    and the global marketplace.                  chief executive. ‘They read these
media. Our four state-of-the-art            To achieve this, some major              reports with a purpose and they
electronic studios and 16 regional      companies have published independent         want the truth, particularly the whole
offices allow us to serve our           sustainability reports; others are           truth – not just selective reporting
clientele in the US and beyond in all   dedicating pages in their regular            where their performance is good.’
their shareholder communication         annual reports to discussing climate            The bottom line? Whenever
needs. With over 40 years’ experi-      change, international labor practices        possible, try to make the sustainability
ence, we serve clients ranging in       and other topical issues.                    conversation as concrete as possible.
size from developmental-stage               Annual reports that place an             Investors are wary of platitudes and
organizations to the Fortune 500.       emphasis on the greener or more              eager to see real initiatives.
Call us or visit our website and        socially responsible side of corporate          FEMSA, the Mexico-based beverage
find out why we are chosen to           life are generally well received.            giant, devoted six pages of its 112-page
produce more annual reports than            ‘Count me in – the readers’ take         2007 annual report to sustainable
any other design firm in the US.        on sustainability reporting’, a May          development. Through photos and
                                        2008 report by the Global Reporting          narrative, FEMSA discussed its
Offices: Atlanta, GA; Boston, MA;       Initiative (GRI), found that 90 percent      environmental stewardship and the
Brentwood, CA; Charlotte, NC;           of readers of sustainability reports         fact that 10.8 mn individuals benefit
Chicago, IL; Cleveland, OH; Dallas,     say their opinion of a company               from its quality of life and community
TX; Denver, CO; Ft Lauderdale, FL;      changed because of the report. Of            development programs.
Hauppauge, NY; Houston, TX;             those whose perceptions changed,                Sustainability represents another
Los Angeles, CA; New York, NY;          85 percent say they had a more               facet of storytelling. Companies can
Princeton, NJ; San Francisco, CA;       positive perception after reading            – and should – use their annual
Washington, DC                          a company’s sustainability report.           reports to present a well-rounded
                                                                                     picture of who they are. The annual
                                                                                     report can be an ideal platform for
   For more information                                                              putting a stake in the ground and
                                                                                     explaining your strategy to the world.
   K     Denis Connors
                                                                                     For many public companies, the
   )     +1 631 435 0400 Fax: +1 631 435 0422                                        annual report remains the best
                                                                                     opportunity out there for telling a
                                                                                     nuanced story that shareholders
  8                                                      will find meaningful, relevant and
                                                                                     perhaps even inspiring.

5.viii                       IR guide                                        Cultivating shareholder loyalty: the annual report

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