Best practiceBest practice

IR magazine SEPTEMBER 200630

A message from the CEO

Three of the best...

A strong letter is clear, engaging,informative and candid. Wayne Leonard,CEO of New Orleans-based Entergy,achieves this with a forthright letter thatacknowledges the impact of hurricaneKatrina on Entergy’s business andemployees and sets a blueprint for whatthe company needs to achieve next.

Many CEOs talk up the value of theiremployees, but rarely do they sound asgenuine as Leonard: ‘Our employeesperformed thousands of individual actsof courage and ingenuity that made ourdarkest moment truly our finest hour,’he writes.

Beyond his sincerity, Leonard isupfront about Entergy’s 2005 numbersand sets out a clear recovery plan. Indiscussing federal and state funding, hepoints out that the money will be used toassist customers, not shareholders. He alsolays out an easy-to-digest plan to restoreEntergy’s ‘financial flexibility.’

Granted, it’s lengthy – weighing in at ninepages – but if you take the time to readJeff Immelt’s 2005 letter, you learn a lotabout GE. This letter achieves the ultimategoal of demonstrating leadership by givinga very thorough report on GE’s results andcommunicating Immelt’s outlook on itsvarious businesses. Here Immelt talksabout how GE’s strategy works to achievethe company’s growth objectives and laysout a series of expectations that providethe reader with a good understanding ofGE’s businesses and prospects.

The theme of the letter – and theannual report – is ‘big’, and Immelt doesa good job of conveying the handicapsas well as the benefits of GE being alarge, complex corporation. ‘Size caninsulate a company from failure until itis too late to change,’ he writes. Whatcomes across here is a hands-on CEOwho is realistic about the challengesand opportunities of his business.

Taking a page out of Warren Buffett’sbook, 2005’s message from Searschairman Edward Lampert addressescontroversial financial issues head-on.Following a discussion of the mergerintegration with Kmart, Lampert launchesinto why he believes same-store sales are not the best metric to measure a retailer’s financial performance. He thentackles the contentious issues of sharerepurchases and pension liability. ‘Whilemost observers focus on repurchases asa way to return cash to shareholders orto offset the dilution from options,[they have] other consequences as well,’he writes.

This letter demonstrates respect forits readers by outlining issues that arerelevant to the company in an efficientand frank manner. Lampert is able totalk specifically about Sears’ businessand uses the letter to raise topics thatmany companies purposely avoid.

The annual letter to shareholders is the ideal opportunity for a CEO to demonstrate his or her leadership skills to investorsand analysts. ‘After reading a good letter to shareholders, you will feel like you just had a meeting with the CEO,’ says LauraRittenhouse, president of New York-based andBeyond Communications and an expert at penning and editing chiefs’ letters.

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Adrienne Baker looks at a sample of the best and worst letters to

shareholders from 2005 annual reports

Best practiceBest practice

...and three of the worst

SEPTEMBER 2006 IR magazine 31

The writing style of Richard Parsons’ 2005letter to shareholders is very generic, withbroad statements that could easily applyto any business. ‘With a workforce drawnfrom all walks of life, we have the expertiseand insights to create a broad array ofproducts and services for more culturallydiverse marketplaces,’ he writes.

Since 2001, the number of wordsused in Time Warner’s annual letter hasincreased by 50 percent, notes Rittenhouse.This is not necessarily a bad thing if thewords have meaning and insight, butParsons’ words don’t resonate or engagethe reader. ‘We are also building businessesto reach growing consumer groups,’ hewrites. ‘In 2005, for example, TurnerBroadcasting’s Adult Swim began itsfirst year as a stand-alone network.’Most readers are unlikely to understandwhat ‘Adult Swim’ is, and what exactlydoes Parsons mean by a ‘growing consumer group’?

In 2005, Boeing CEO Harry Stonecipherresigned after just over a year in theposition when his relationship with afemale executive came to light. CurrentCEO Jim McNerney stepped in to revivethe beleaguered aerospace giant, but hedoesn’t use his first letter to tackle thecompany’s culture problems effectively.

This could be an opportunity torevive the reader’s confidence inBoeing’s leadership but, as with TimeWarner, Boeing’s message to share-holders is full of platitudes with littlemeat to back them up. ‘We can ‘playbigger’ as a team and make the wholeadd up to more than the sum of theparts,’ writes McNerney.

There is lots of discussion throughoutabout what the new CEO would like todo with the company, but very littlefocus on what needs to be fixed. This isa classic example of a letter that tellsbut fails to show.

Written in a conversational, Q&A style,Cigna CEO and chairman EdwardHanway’s letter to shareholders fails toinstill trust in the reader. Hanway kicks offby claiming the company has had a verygood year in 2005, but total revenues atthe Philadelphia-based benefits providerare down for the first time in five years.The earnings per share figure is also down.A letter that glosses over the facts willimmediately put off analysts and investorswho are familiar with the company.

Hyperbole rather than clarity charac-terizes Hanway’s responses throughoutthe letter. ‘We believe that the shift toconsumerism will require benefitsproviders to take a more active andholistic approach to health care,’ hewrites, in answer to a question about the effect of consumerism on healthcare.Both the question and the response dolittle to enlighten the reader on thetrends driving changes in this industry.

‘It is my view that the shareholder letter is read because it is a window on leadership and a reflection on the culture and how the leader intends to nurture that culture,’ she adds. It’s critical that this letter not become a lost opportunity for companies.In preparation for the 2006 letter, here are some examples of well-executed – and poorly written – letters from 2005. ■

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