Annual Reports, Like the State of the Union, are an Obligation and an Opportunity
by Jeff Nussbaum
At the end of January, 1965, the shareholders of Buffett Partnership, Ltd — the precursor to Berkshire-Hathaway — received their first shareholder letter from Warren E. Buffett, General Partner. Even today, readers of that early letter will find it to be peppered with the wit and wisdom that have made Buffett’s letters such a must-read over the years.
One piece of advice from Buffett stands out to me as particularly relevant for communicators today: “One of my friends — a noted West Coast philosopher — maintains that a majority of life’s errors are caused by forgetting what one is really trying to do.”
At about this point in annual report season, various companies are in the midst of assembling and releasing a flurry of annual letters, annual reports, CSR and ESG reports. For leaders who seek my counsel in delivering what can be the CEO’s equivalent of the President’s State of the Union address, my advice is to focus on answering a simple question: what are we trying to do?
Year after year, we see reports prefaced by CEO letters where it seems the primary goal is to produce a glossy document that receives little attention at all. Given the amount of paper that goes into printing them, most of these reports become the proverbial tree that falls in the forest, not to be heard.
That’s a significant missed opportunity.
In 2017 Elizabeth Hanano, an independent consultant, analyzed shareholder letters from S&P SmallCap 600 index companies. She graded each of the 377 available letters on a 1–10 scale, based on traits like candor, educational value, storytelling, entertainment value, and, of course, clarity in defining the company and its strategy. Two findings stood out:
- Companies that had the highest-rated shareholder letter outperformed the S&P SmallCap 600 on a 1- 3- and 5-year basis. (And yes, I recognize that correlation isn’t causation, but I also believe there’s an important correlation between your ability to say clearly what you’re doing, and actually doing it well.)
- The second was that only about 3% of the letters were worth reading.
By law and by custom, very little is required of an annual report: not much more than basic information about an organization’s operations and financial outcomes.
The same is true of the President’s State of the Union — “[The President] shall from time to time give to the Congress Information of the State of the Union.”
Over time, however, leaders have recognized that simply meeting the minimum fails to meet the moment.
While the worst States of the Union do little more than ramble through a litany of programs, the best tell a story, putting their programs, successes (and sometimes failures) in the arc of a larger narrative, and help align supporters behind a clear vision for the future. Beyond that, they recognize that while the obligation is to inform, the opportunity is to inspire.
These should be the same goals for any annual report.
Jeff Bezos’s letters are famous for this. In his 2020 letter to shareholders, he included a heartwarming letter he had received from a family that purchased two shares when Amazon went public, explaining how those shares have changed their lives. It served as an approachable, powerful way to remind readers of the value created over time, the fact that Bezos “listens” to his customers, that many, many shares of Amazon are owned by individual investors, and that value creation over time remains the top (and often only) priority.
Additionally, by clearly explaining the previous decisions a leader has made and why, they provide clarity around a framework in which the leader will approach challenges and make future decisions.
Consider Jamie Dimon’s letter to shareholders last year. Even the salutation “Dear Fellow Shareholders” helps strike a tone that if you’re a shareholder, your CEO is in it with you. He uses the letter to restate the principles he has led by “starting from my time as CEO of Bank One in 2000” — and establishing a framework for how and why he will make the decisions he does.
Or, as Buffett has often repeated over the years: “Our goal is to provide you with the information we would wish to have if our positions were reversed.”
As leaders and organizations churn out this year’s crop of annual reports, it should be clear that there’s a better return to be had on the huge expenditure of energy required by investor relations and communications teams to produce them.
Even if your words are never delivered in a primetime address or are found to be so compelling that they are, as are Warren Buffett’s letters, collected in book form, they can still fulfill their purpose if you stay focused on what you’re trying to do. That’s a good thing not to forget!
