A LETTER FROM THE CEO
A CEO’s annual letter gives investors unique insight and understanding of the company. Annual letters offer a peek behind the curtain to see how a company is performing and what drives the decision-making process the management team employs. It’s also a great opportunity to allow the CEO to demonstrate him/herself as a thoughtful, experienced leader to build trust and accountability with the investment community.
Here are some top tips from the best annual CEO letters as a guide:
Treat the reader as a partner who wants to gain a deep understanding of the business and decision making.
A CEO’s letter should aim to be informative, accessible and should not contain too much jargon. Warren Buffet uses this to great effect in his renowned annual letters by pretending he is talking to his two sisters, Doris and Bertie, who are smart but not active in business. Buffett also uses framing to structure his letters. In his 2019 letter, he imagined that his sisters were planning to sell their shares, and he broke down exactly what he would do if he were in their position. According to Buffet, he used the letter to communicate what he would want his sisters to know before they made a decision.
You can read Buffett’s Letters here.
Address what went right and what went wrong for the company.
A CEO’s credibility regarding his/her achievements is directly tied to their ability and willingness to acknowledge challenges, and at times, admit mistakes. Nothing builds trust with shareholders better than honesty and transparency. Hedge fund manager, Bill Ackman, who runs Pershing Square Capital Management, is not exactly known for his humility. However, after losing a reported $3 billion of investor’s capital with a bad bet on Valeant Pharmaceuticals, he had no choice but to “assume 100% of responsibility” for his “huge mistake” in his 2016 annual report, and highlighted several important learnings from the experience. A bitter pill to swallow to be sure, but investors recognized and appreciated this candid approach.
Read Bill Ackman’s Pershing Square Letters here.
Numbers are great but mean nothing without context.
A letter that reviews relevant metrics in the context of company strategy gives the reader a clear perspective of the business. Amazon is famously obsessive about its customer focus which stems from former CEO, Jeff Bezos. In his letters, Bezos goes into meticulous detail regarding the value Amazon provides to its customers. Here’s an excerpt from Bezos’ 2020 annual letter:
“Customers complete 28% of purchases on Amazon in three minutes or less, and half of all purchases are finished in less than 15 minutes. Compare that to the typical shopping trip to a physical store – driving, parking, searching store aisles, waiting in the checkout line, finding your car, and driving home. Research suggests the typical physical store trip takes about an hour. If you assume that a typical Amazon purchase takes 15 minutes and that it saves you a couple of trips to a physical store a week, that’s more than 75 hours a year saved. That’s important. We’re all busy in the early 21st century.”
“So that we can get a dollar figure, let’s value the time savings at $10 per hour, which is conservative. Seventy-five hours multiplied by $10 an hour and subtracting the cost of Prime gives you value creation for each Prime member of about $630. We have 200 million Prime members, for a total in 2020 of $126 billion of value creation.”
This is a great example showing that although numbers are important, connecting business performance to the bigger picture is what drives home a company’s value.
Amazon shareholder letters can be found here.
Let shareholders get to know the management team.
The strength of the management team has a huge effect on investors’ decisions to become shareholders. Do investors find the management team to be suitable partners? Do they believe they will execute in favor of improving economic returns to shareholders over the long term? The best CEOs use the annual letter as a time to reflect on the year that was and remind investors and their team where they see the future of the company.
While not everyone agrees with Jamie Dimon, CEO and Chairman of J.P. Morgan, there is no question he is a brilliant leader and that’s reflected in his annual letters. In his 2020 letter to shareholders, he states, “When most CEOs and board members wake up each morning, they worry about all of the things that they need to do right to build a successful company. A company is like a team. We must do many things well to succeed and ultimately, that leads to creating shareholder value.”
Reading that, you get the sense that Dimon is a demanding but fair person to work for. If you do everything necessary to do your job well, you will be rewarded with more responsibility and compensation. Also in the 2020 letter, Dimon is frank about the threats facing J.P. Morgan and warns shareholders that the banking industry’s disruption by technology is finally at hand and hints at future strategy:
“Banks have enormous competitive threats - from virtually every angle,” he said. “Fintech and Big Tech are here… big time!” he added. “While I am still confident that JPMorgan Chase can grow and earn a good return for its shareholders, the competition will be intense, and we must get faster and be more creative.”
“Acquisitions are in our future, and fintech is an area where some of that cash could be put to work,” he concluded.
Jamie Dimon’s letters can be read here.
If done correctly, a CEO’s annual letter is a powerful medium that facilitates a connection between the management team and shareholders. There is nothing worse than a long-winded, complicated letter that no one can understand. A succinct, clear and concise letter that is honest and informative can really help influence investor and market sentiment.
