numbeR 5
A changing
loyalty counts         ...
A cover can say it all                                                                     think votes
   the slot machine...
Making your
                                      story sing
the big picture      ...
Let your personality shine                                                               can you be too creative?
                                        formats abound

XbRl approache...
Be creative                                                                               Walking the talk
   diversified ...

Sponsor’s stat...
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Cultivating shareholder loyalty: the annual report

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IR Guide

  1. 1. GUIDE numbeR 5 Cultivating Where are individual shareholders when we need them? shareholder Why storytelling counts more loyalty: 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
  2. 2. A changing landscape A 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 100% 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 40% 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
  3. 3. 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
  4. 4. Making your story sing D 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
  5. 5. 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
  6. 6. Different formats abound F 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
  7. 7. 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
  8. 8. Embracing sustainability O 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