Cover Story Annual Shareholder Letters

By Cheryl Soltis Martel

Wall Street is about numbers: P/E ratios, assets on hand, out- and quality of content in a letter. The company annually ranks standing debt, value at risk, return on equity. All those metrics letters based on high and low measures of candor, and it has carry a wealth of significance for investors seeking insight into a found a positive correlation between candor and share prices. company’s prospects. But shareholders should not overlook an- Rittenhouse says there are several characteristics she looks for in other potential source that taps into the mind of the chief execu- effective letters: strategy statements, capital stewardship metrics, tive: the annual shareholder letter. a discussion of the business model, accountability systems, inno- Annual letters can be mercifully short and simple. But the best vations, leadership, stakeholder relationships and overall candor. annual letter writers recognize that managing a complex enter- Fortunately, there are more than a few CEOs who are visibly and prise has elements of empire building, battlefield risk and quelling vigorously excited about their companies. The letters excerpted on social unrest among shareholders, and they have a knack for the following pages illustrate 10 exemplary communications by bringing investors into these issues with often colorful and candid CEOs, chairmen and, in one instance, a board of directors, that disclosures about the pros and cons of running the business. The provide value to shareholders beyond a simple snapshot of the most effective letters also reveal a company’s spirit or culture; they company’s financial state. Also included are seven letters (including convey optimism (or pessimism) about the future and the com- one from a recent internet IPO) that because of the special circum- pany’s plan for staying the course better than any spreadsheet. stances addressed in a clear, straightforward manner deserve mention. Eric Heyman, senior vice president and director of research at Olstein Capital Management, notes that effective shareholder Selection Methodology letters clearly articulate the company’s strategy and offer specifics NACD Directorship primarily examined annual report letters from about the types of benchmarks the company expects to achieve in Fortune 200 companies filed for 2011. While a few of the selections a candid, open and realistic manner. may raise eyebrows due to recent events, controversy is not equated “A shareholder letter is not only forward looking but backward with bad management. Even when led by the most highly regarded looking,” Heyman explains. “A CEO really has to communicate CEOs, the complexity of these global enterprises may cause circum- to the investment community what took place during the year, stances to reorganize in such a way as to surprise everyone. That is what goals the company set and how it met or didn’t meet those the lesson of capitalism. Letters were chosen based on those com- goals, and what the changes are going forward. Shareholders munications that even in the most challenging times show foresight, need that information to make better decisions on how to view clarity and conviction. Those featured here were evaluated across their investments.” industries using the following criteria: Illustr a ■■ One particular element of a successful shareholder letter is con- A dynamic assessment of the company’s performance tION by greg c o pel an d sistency, says Heyman. “You want the same candid, clear, concise ■■ Transparency on both positive and negative news communications in good times and in bad times,” he explains. ■■ A clear outline of steps to tackle company challenges L.J. Rittenhouse, president of Rittenhouse Rankings, an in- ■■ A strategic process linked to changes in environment vestor relations firm, has analyzed shareholder letters for more ■■ Insights into the quality of management and its commit- than a decade and has developed a model to quantify the amount ment to creating shareholder value

24 NACD Directorship July/August 2012 July/August 2012 www.directorship.com 25 Cover Story Annual Shareholder Letters

The 8 Rules of a Great Annual Letter Rule 3: Bring up succession without sounding like you’re looking at retirement homes. Berkshire Hathaway “Your Board is equally enthusiastic about my suc- By Jeffrey M. Cunningham cessor as CEO, an individual to whom they have had a great deal of exposure and whose manage- On Feb. 25, 2012, the best oddsmaker in America— rial and human qualities they admire. (We have two who happens to live not in Las Vegas or Atlantic superb back-up candidates as well.) When a transfer City, but in Omaha—penned his annual letter to of responsibility is required, it will be seamless, and shareholders on the bets placed the year before. To Berkshire’s prospects will remain bright….Do not, translate the dry, quantitative concepts of business however, infer from this discussion that Charlie and I into Buffettese is an exacting task, and one that he are going anywhere; we continue to be in excellent approaches with legendary skill. While he takes health, and we love what we do.” credit for performance when it’s due, he is equally enthusiastic about pointing out the errata in his sto- Rule 4: Your shareholders have forgotten all about ried quest for value creation. Both are examples of your business model. Remind them. Letter Writer what sets great chief executives apart: a palpable con- “Our insurance operations continued their delivery Warren Buffett, viction in their vision and a willingness to learn from of costless capital that funds a myriad of other op- Chairman, CEO downdrafts as well as windfalls. In adhering to a rule portunities. This business produces “float”—money Date oN Letter of “anything but truth is unspeakable,” always borne that doesn’t belong to us, but that we get to invest Feb. 25, 2012 by the facts, argued with determination and proffered for Berkshire’s benefit. And if we pay out less in losses to shareholders who decide with their wallets, Buffett and expenses than we receive in premiums, we ad- Length of Letter 18,426 words reveals how well he knows his customer. Berkshire’s ditionally earn an underwriting profit, meaning the shareholders expect nothing less than that the boss float costs us less than nothing. Though we are sure subject himself to the same fierce scrutiny that he to have underwriting losses from time to time, we’ve demands of his bullish investments. He has been at now had nine consecutive years of underwriting this for more than 40 years, so he’s fairly confident of profits, totaling about $17 billion. Over the same nine the mechanics of the enterprise, yet not a year goes years our float increased from $41 billion to its current by without something that shocks and amazes him. record of $70 billion. Insurance has been good to us.” And when it does, like an excited schoolboy, he can’t wait to bring the new learnings to the attention of his Rule 5: Appeal to universal, not personal, greed, shareholders. Here are the eight rules distilled from because, after all, it is about money. one of the greatest businessmen of our lifetime. “We expect the combined earnings of the four [busi- ness units]—and their dividends as well—to increase Rule 1: Master the art of understatement. in 2012 and, for that matter, almost every year for a “Charlie Munger, Berkshire’s Vice Chairman and my long time to come. A decade from now, our current partner, and I feel good about the company’s prog- holdings of the four companies might well account ress during 2011.” for earnings of $7 billion, of which $2 billion in divi- dends would come to us.” Rule 2: Give your board credit. “The primary job of a Board of Directors is to see Rule 6: If there’s bad news, hit them over the head that the right people are running the business and to with it. This way your shareholders won’t have to be sure that the next generation of leaders is identi- take notes. fied and ready to take over tomorrow. I have been “I’ve run out of good news. Here are some develop- on 19 corporate boards, and Berkshire’s directors are ments that hurt us during 2011: A few years back, I at the top of the list in the time and diligence they spent about $2 billion buying several bond issues of have devoted to succession planning. What’s more, Energy Future Holdings, an electric utility operation their efforts have paid off.” serving portions of Texas. That was a mistake—a big

26 NACD Directorship July/August 2012 mistake....Last year, I told you that ‘a housing recovery will prob- Rule 8: Talk about your team from a shareholder perspective ably begin within a year or so.’ I was dead wrong.” and show why they care as much as the CEO. “For good reason, I regularly extol the accomplishments of our Rule 7: Use the specifics of your business to show Wall Street operating managers. They are truly All-Stars, who run their busi- how your performance should be measured. nesses as if they were the only asset owned by their families. I be- “Charlie and I measure our performance by the rate of gain in lieve their mindset to be as shareholder-oriented as can be found Berkshire’s per-share intrinsic business value. If our gain over time in the universe of large publicly owned companies. Most have outstrips the performance of the S&P 500, we have earned our no financial need to work; the joy of hitting business ‘home runs’ paychecks. If it doesn’t, we are overpaid at any price.” means as much to them as their paycheck.”

Even Warren Buffett Needs an Editor

Carol Loomis, a senior editor at Fortune magazine, has edited and that often she has to remove “adjectives that are plowed Warren Buffett’s annual letter to shareholders for more than 30 up in front of a noun.” What they sometimes disagree about is a years. In a recent interview, Loomis said Buffett first approached joke: whether it’s funny or not. In the early days, Buffett pictured her about reviewing his letter in 1977. By that time, the CEO of that his readership—whom he was writing for—were his two sis- Berkshire Hathaway and Loomis had been friends for at least 10 ters, Bertie and Doris, and presumably they laughed on cue. years. “He trusted me,” she says. In troubled times, readers recognize that Buffett’s letters can be According to Loomis, Buffett had been asked to serve on a particularly instructive. He doesn’t shy away from the negative. In- study committee by the Securities and Exchange Commission to stead, in his own plain-talking style, as common to his writing as it better understand how to improve shareholder communications is when his is being interviewed on stage in front of tens of thou- and had decided to change the annual report. “I joke that in the sands of shareholders, Buffett lays it on the line. Loomis, who reads first letter I asked him to change an ‘a’ to a ‘the’ and from there it annual reports as a matter of course as a business journalist, says grew,” she recounts. In those days, Buffett handwrote the letter, most other CEOs simply do not give the exercise the attention it then his assistant typed it up and overnighted it to Loomis’ home, deserves. “They should use their annual report as a means of com- where she would mark up changes and send it back overnight. municating with their shareholders, and they just don’t,” she says. (All of Berkshire’s letters are archived on the company’s website.) A case in point: Two years ago at a dinner, Loomis says she found Loomis says she doesn’t see a first draft. Buffett probably herself seated next to a CEO who had just taken over a troubled writes and edits at least a couple of versions of the letter before company and was about to write his first annual report letter. He he sends it to her to read. “I send him my changes, and he either said he wanted to write about the good and the bad, but his public accepts them or he doesn’t. We don’t talk about it or go back and relations people felt otherwise. Loomis says she told him, “You forth on the phone because we both get too angry. But if I feel have a chance here to establish your personality strongly, I will argue.” with your shareholders. You want to lay it all Mostly, Loomis is reviewing for tone and substance. The basis out there. I know he was convinced, and I of the relationship, she says, is that “he had a fair amount of waited for his letter. I was disappointed to trust in me to begin with that has just built up over the years. He see that his PR people had won.” knows that I am really interested in making [the letter] as good If you contrast Buffett’s with the average as it can be—that I have no ulterior motive.” Whenever Loomis CEO annual letter, it will be obvious to writes about Buffett for Fortune, where she has been writer for most that the majority are written more than 50 years—as she did recently when it was disclosed by the public relations depart- that the Oracle of Omaha, as he has become known, has prostate ment. That’s an acceptable ap- cancer—there is a disclosure that she is both a friend of Buffett’s proach. Writing may not be among and a Berkshire Hathaway shareholder. the CEO’s strong suits. But every Are there any usage faux pas that Buffett routinely makes? writer needs an editor, even if While describing him as “quick to learn,” Loomis says she kids that writer is the CEO of Berk- Buffett that “he missed the class where they taught active verbs,” shire Hathaway. —Judy Warner p ho t o c urtesy of Ca r o l Loomi s

July/August 2012 www.directorship.com 27 Cover Story Annual Shareholder Letters

Two Are Better Than One ucts. We launched Drive Wise, which is a telematics offering that gives customers discounts based on Allstate their actual driving behaviors. Good Hands Road- On the same day that Allstate’s Tom Wilson signed side, the first pay-as-you-use roadside service, cap- his letter to the shareholders, the Allstate board of tured 400,000 members. The four-state test of the directors issued its own letter. The board’s letter new Claim Satisfaction Guarantee for auto insurance thoroughly discusses was successful and led to a national launch early in executive compensa- 2012. We also made progress broadening our rela- tion, board effective- tionships with customers by increasing life insurance ness and the expanded policies sold through Allstate Agencies in 2011 by 33 LETTER WRITERS responsibilities of the percent from the prior year.” Thomas J. Wilson, lead director. Wilson’s Chairman, letter focused on the Excerpts From the Board’s Letter President and CEO, company’s commit- “We made changes to our executive compensation and the Board of ment to customers program based on stockholder input and discussions Directors and innovation, and with our independent compensation consultant on DATE ON LETTER offered a bullet list of recent market trends. The changes are ­designed to April 11, 2012 financial highlights. further align pay with performance. LENGTH OF LETTER: Having two letters Tom Wilson “…Reduced Change-in-Control Benefits—We Wilson: 723 words; to read offers share- revised our change-in-control arrangements. For directors: 691 holders the opportunity to see how the messages senior executives, the new plan eliminates tax gross words and goals from the C-Suite and the board align. ups and pension enhancements. Severance bene- —Cheryl Soltis Martel fits were lowered for senior executives, except the CEO. In addition, beginning in 2012, equity awards Excerpts From the Chairman’s Letter will have a “double trigger,” which means that they “Allstate is one of the great ‘main street’ financial will not vest in the event of a change-in-control, un- institutions in the United States, serving 16 million less also accompanied by a qualifying termination households. We have maintained this position for of employment. more than 80 years by proactively addressing and “Raised Performance Standards on Long-Term driving change. In 2011, we continued this legacy Equity Awards—We changed the mix of long-term by acquiring the capabilities to further execute our equity awards granted to our senior leadership strategy while delivering strong underlying financial team. For 2012, long-term equity awards consisted performance in the face of another year of unprec- of 50% performance stock awards and 50% stock edented catastrophe losses. options. Previously this mix was 35% restricted stock “…Allstate’s strategy is to provide differentiated units that vested over time and 65% stock options. products to distinct customer segments. Allstate “Narrowed the Benchmark Compensation Agencies provide excellent service and a broad array Range—We changed the benchmark target used of products to customers who want local advice and for total direct compensation to the 50th percen- differentiated products. The acquisition of Esurance tile of the peer group we use for compensation and Answer Financial in 2011 further expanded our purposes. The benchmark had previously been a

capabilities to meet the needs of customers who range between the 50th and 75th percentiles. of a llst p ho t o c urtesy prefer to handle their own insurance needs. The “…Restructured Lead Director Role—We ex- acquisition makes Allstate the only personal lines panded the responsibilities of the lead director company that has unique offerings for all customer and shifted from a model where this responsibility segments. rotated among directors. H. John Riley, Jr. was “We also continued to reinvent protection and elected our lead director based on his leadership a te retirement for the consumer with innovative prod- skills and extensive experience with Allstate.”

28 NACD Directorship July/August 2012 Enhancing Fan Affection annual dividend for a The Coca-Cola Co. 50th consecutive year. —Judy Warner Muhtar Kent’s effusive enthusiasm is both palpable and contagious, matched by his knowledge of all “In 2011, we focused facets of the company he has led for the past four on realizing our 2020 years as CEO and three years as chairman. His Vision—an aggres- letter has an entrepreneurial ring, and one gets the sive but achievable LETTER WRITER message that he is up at dawn and can’t wait to get system-wide plan for Muhtar Kent, to work each day. The brand that once taught the growth launched at Chairman and CEO world to sing celebrated its 125th anniversary and the outset of 2010. DATE ON LETTER moved its highly secretive formula to a new vault. Muhtar Kent How did our efforts April 1, 2012 He writes that even after three decades in the bev- measure up against erage business he is “amazed and energized by the the 6 Ps of our 2020 Vision? Let us take a look at LENGTH OF LETTER outpouring of affection for Coke.” Shareholders each one: Profit, People, Portfolio, Partners, Planet 1,413 words should be energized as well—Coke increased its and Productivity.

Delivering on Commitments

FedEx improving earnings per share 10 percent to 15 per- As digital communications expand, the world cent, increasing cash flows, and increasing returns seems to be shrinking, though physical distribution on invested capital. still faces an ­inherent “Second, we intend to improve on our estab- distance obstacle. lished reputation as an ethical company. We’re FedEx’s letter dem- dedicated to conducting our business around the onstrates its dedica- world in an honest and forthright way. It starts with tion to bridging this our transparency in financial reporting, for which last barrier to global we’ve been recognized consistently. We will con- trade. Fred Smith tinue do the right things for our shareowners, our outlines plans to cap- customers, our team members and the communi- LETTER WRITER Frederick W. italize on expanding ties we serve. We leveraged our long-standing rela- Smith, Chairman economies while im- tionships with humanitarian organizations to deliver and CEO proving on practices critical medical and emergency supplies to Japan in the first world to following the recent earthquake and tsunami. To DATE ON LETTER Fred Smith As of May 31, 2011 promote shareholder support these relief efforts, we committed $1 mil- value, protect the environment and serve an in- lion in cash and in-kind transportation. Overall in LENGTH OF LETTER creasingly hyperconnected customer base. FY11, FedEx donated nearly $5 million in in-kind 808 words —Elizabeth Mullen disaster relief shipping. “Finally, we’ll reinforce our reputation as a great “First, we are committed to growing our earn- place to work. Nothing inspires more pride than ings. We exist to serve our customers and to earn our team members delivering the Purple Promise— a profit for our shareowners. As we’ve shown with ’I will make every FedEx experience outstanding.’ our most recent earnings results, we’re on track Because of their relentless dedication, we’re ranked to achieve the long-term financial goals to which among the Top Ten on Fortune’s World’s Most Ad- we’ve adhered for many years: growing our rev- mired Companies list and on the Reputation Insti- enue, achieving 10 percent-plus operating margins, tute’s list of most admirable U.S. companies.” c o urtesy of in d iana u niv ers i ty

July/August 2012 www.directorship.com 29 Cover Story Annual Shareholder Letters

“…Coca-Cola and our other brands occupy a Coca-Cola, the oxygen of our business. Brand Coca- unique place in the hearts of people worldwide, and Cola grew more than 3 percent for the year, adding 350 we did not take that position for granted in 2011. million incremental unit cases. We also invested in our Instead, we sought out new and better ways to en- 14 other billion-dollar brands, including Minute Maid hance our fans’ affection for our brands. Pulpy, which grew 20 percent by volume in 2011. “This effort took many forms, from making sure “And we introduced more consumers to the we had compelling marketing and effective mer- wonders of Coca-Cola Freestyle—the innovative chandizing, to creating memorable moments of con- new fountain dispenser that delivers more than 125 nection and fun, to participating in inspiring events. branded beverage choices with less environmental “For 2011, we ramped up our efforts to win with impact than our traditional legacy equipment.”

Dawn of a New Economic Era

General Electric of cash, the willingness to invest even when the fu- ture is unclear, and great people. Jeff Immelt’s letter concentrates on the volatility “…We live in a tough era in which the public of the economy, drawing the conclusion that this discourse, in general, is negative. I worry that the rocky environment may not be a temporary bump mood of the times prevents us from moving for- in the road, but the new way of doing business. ward. American companies, particularly big com- The GE CEO doesn’t shy away from disclosing panies, are vilified. There is social unrest in many the negative effect the European economic crisis corners of the world. This should not be a surprise. has had on investor anxiety, and he uses it as an Our problems are difficult; when economic prog- opportunity to highlight the need for strong risk ress is uneven and unemployment is high, we need management, liquidity, the willingness to invest to work together to find a better way. and strong people. “In these times, it is difficult to explain the benefits urtesy of GE p ho t o c urtesy LETTER WRITER Immelt also makes note of four economic inter- of globalization. GE is an infrastructure company. The Jeffrey R. Immelt, ests GE is keeping an eye on: China’s changing U.S. is not investing much in infrastructure, but most Chairman and CEO growth prospects, the outlook for Europe, how other countries are. We will sell 140 heavy duty gas DATE ON LETTER the political winds will affect consumer spending turbines in 2012; fewer than five will go to the U.S. Feb. 24, 2012 in the United States and whether inflation will So, we must sell in 120 countries; we must derail the recovery. —Cheryl Soltis Martel build global capability; we must ex- LENGTH OF LETTER port. In the last decade our 4,768 words “Today, we live in what most business commenta- exports have more than dou- tors call a volatile world. bled, creating thousands “I would argue that when the environment is of high-paying American continuously unstable, it is no longer volatile. jobs. We are consistently Rather, we have entered a new economic era. The among America’s top ex- emerging economies grow, while the developed porters. Are we ‘un-Amer- world slows. Some of the world’s largest economies ican’ because we sell around face massive fiscal deficits and must deleverage. the world? No. Our company, Interest rates are likely to stay low for extended pe- because of our great people, riods. Material prices are moving higher. There is can win. And, that is the broad-based social unrest. And, it could remain this American spirit.” way for a long time. “…I have learned that nothing is certain except for the need to have strong risk management, a lot

30 NACD Directorship July/August 2012 Time for a Tune-Up Explaining the Controversial General Motors Google

GM CEO Dan Akerson honestly and gracefully “Long term” appears 14 times in the letter to addresses the shareholders of a company slowly re- shareholders signed by Google co-founders Larry covering from a credit rating a notch below invest- Page and Sergey Brin. But unlike typical usage, in ment grade and working to shake its TARP rescue Google’s case it is the paramount strategic driver. from the public’s memory. Rather than try to win The founders write of wanting the focus to remain over investors with squarely on the important things that matter in the hyped-up colorful world, and when this objective is coupled with their LETTER WRITER stories, he allows the obvious and enduring love for their company, it Daniel F. Akerson, company’s recent softens up the shareholders for the elephant in the Chairman and CEO successes and future boardroom—a plan to create a new class of non- projects to send forth voting capital stock that will enable Page, Brin and DATE ON LETTER As of Dec. 31, a message of renewal. Executive Chairman Eric Schmidt to retain ma- 2011 Akerson reminds jority voting power and, as they write, create tech- investors of the stra- nology that enriches millions of people’s lives in LENGTH OF LETTER tegic principles he deep and meaningful ways and generate significant 1,789 words has invoked for the returns so that Google remains a successful growing Dan Akerson company since day one: producing the best vehicles, strengthening the brand’s value, growing profitability globally and maintaining a “fortress balance sheet.” Akerson openly addresses the difficulties the company faces in Europe and South America, lingering pension liabilities and redundancies within the company’s benefit and organizational structure, and provides a realistic plan to overcome these obstacles. —Elizabeth Mullen

Larry Page (left) and Sergey Brin “This commitment to peak performance is part of a broader culture change underway at GM—change business. For current shareholders, this new class of that goes a long way toward explaining why we ac- stock represents a two-for-one stock split. The co- LETTER WRITERS a ge an d sergey br in c o urtesy of g oo gle complished so much in our first full year as a public founders refer to their first letter eight years before, Larry Page, CEO company. in which they outlined the decision to create a dual- and Co-founder, and “Each day the cultural change underway at GM class governance structure: “We want to ensure that Sergey Brin, Co-founder ­becomes more striking. The old internally focused, our corporate structure can sustain” long-term de- consensus-driven and overly complicated GM is being velopment efforts. —Judy Warner DATE ON LETTER reinvented brick by brick, by truly accountable execu- April 2012 tives who know how to take calculated risks and lead “…Today we announced plans to create a new class LENGTH OF LETTER global teams that are committed to building the best of non-voting capital stock, which will be listed on 1,397 words vehicles in the world as efficiently as we can. NASDAQ. These shares will be distributed via a stock “…That’s the crux of our plan. The plan is some- dividend to all existing stockholders: the owner of thing we can control. We like the results we’re each existing share will receive one new share of the starting to see and we’re going to stick to it—always. non-voting stock, giving investors twice the number

rry p p ho t o of d an a kers on c urtesy of g m ; p ho t o l a rry That’s my commitment to you.” of shares they had before. It’s effectively a two-for-

July/August 2012 www.directorship.com 31 Cover Story Annual Shareholder Letters

one stock split—something many of our investors big picture until it crashes on his head. Perhaps have long asked us for. These non-voting shares will for this reason, as this issue went to press, JPMor- be available for corporate uses, like equity-based gan’s stock was making a return voyage toward its employee compensation, that might otherwise di- previous levels. —Jeffrey M. Cunningham lute our governance structure. “We recognize that some people, particularly “2011 was another year of challenges for JPMorgan those who opposed this structure at the start, won’t Chase, the financial services industry and the econ- support this change—and we understand that other omies of many countries around the world....the companies have been very successful with more frustration with—and hostility toward—our industry ­traditional governance models. But after careful continues. consideration with our board of directors, we have “…Meeting new regulatory requirements will decided that maintaining this founder-led approach be a large, costly and is in the best interests of Google, our shareholders complex endeavor and our users. Having the flexibility to use stock and we must get it without diluting our structure will help ensure we are right. It has been es- set up for success for decades to come.” timated that there are 14,000 new regulatory Looking Ahead—Always requirements that will be implemented over JPMorgan Chase & Co. the next few years. Our definition of financial services is an industry Three hundred out of that creates chaos among those who don’t under- the 400 Dodd-Frank stand it and regret among those who do. rules still need to be Jamie Dimon’s annual letter is among the most Jamie Dimon completed. eloquent and insightful of any we reviewed. But “…Over the next few years, we estimate that simply because JPMorgan’s CEO recognizes the tens of thousands of our people will work on these risks inherent in his kind of business does not mean changes, of whom 3,000 will be devoted full time to those risks can always be avoided. That is how, de- the effort, at a cost of close to $3 billion. We must not spite being the largest, most profitable bank in the let regulatory reform and requirements create exces- United States, the venerable financial institution sive ­bureaucracy and unnecessary permanent costs. found itself at the center of a hedging firestorm “…For example, different regulators have asked that included sovereign regulators, the Securities for different reports on some very complex issues and Exchange Commission and a good deal of such as global liquidity. We are going to try to build Letter Writer unwanted attention from Capitol Hill. But Dimon one report that meets all their needs and ours, too— Jamie Dimon, clearly knows his business better than most and as opposed to preparing three completely different Chairman and CEO knows how to work through the tempest-tossed seas liquidity reports every day or every month. Three re- Date oN Letter of global banking. As an annual letter writer, his ports lead to more mistakes, less understanding and March 30, 2012 tone and take are exemplary, and his sharp candor more work. and stunning insights have been noted as superior “…We operate in a complex business with LENGTH OF LETTER by no less a critical reader than Warren Buffett. high and increasing regulatory demands and risk. 21,687 words If there is a moral to the story (other than to Whether or not we agree with all the new rules and avoid the banking industry altogether), it may be business processes, we want you to know that we that predicting danger and then succumbing to it will strive to meet or exceed every regulatory re- a ss o c ia may still result in investor patience over the long quirement around the world. This simply is the way

run. People are more inclined to believe in a ge- we run our business. ted press nius with an experiment that didn’t work out as “While we agree with much of the reform that has planned than the fellow who doesn’t even see the been put in place, we do not agree with all of it. As a

32 NACD Directorship July/August 2012 result of Dodd-Frank, we now have multiple regula- “…And most banks that have gone bankrupt tory agencies with overlapping rules and oversight did so by making bad loans—not by trading. In any responsibilities. Although the FSOC was created, it case, we are well-positioned to be a winner in the is proving to be too weak to effectively manage the investment banking business. While we do believe overlap and complexity. that there will be some large-scale changes affecting “…We do not disagree with the intent of the the business—driven by both regulation and inno- ­Volcker Rule....If the intent of the Volcker Rule was vation—J.P. Morgan has the breadth—we are one to eliminate pure proprietary trading and to ensure of the top players in almost all of the markets that that market making is done in a way that won’t jeop- we deal in—and necessary economies of scale to ardize a financial institution, we agree. emerge as a winner.”

Walton Family Vision Endures

Walmart “We recognize the importance of board indepen- Chairman’s Letter Few companies take the time to dence. We separated the roles of board chairman substantively mention their board and corporate gov- and chief executive officer nearly 25 years ago in ernance in their annual letter. Employees, customers, 1988, when Dad became chairman and David Glass even government all get kudos, but the board appears chief executive officer. This decision promoted to be off in the wings. Not so at Walmart, where even greater accountability and responsibility. Chairman (and major shareholder) Rob Walton “Ten of our current board members are inde- takes the board’s role seriously. In his annual letter, pendent, and we have an independent presiding Walton emphasizes the board’s role in overseeing director. All directors must stand for election the retail empire developed by his father, company each year and receive majority votes. Based on founder Sam Walton, and provides detail into new the board’s recommendation, we provide share- Letter Writer practices adopted by the board. No doubt some holders with an annual ‘say-on-pay’ vote, which Robert Walton, people will challenge this assumption after the re- received overwhelming shareholder approval Chairman cent problems in Mexico. But having the founder’s last year. Date oN Letter “We added an additional board meeting to the son and chairman assure shareholders of the board’s As of Jan. 31, commitment to good corporate governance ensures 2012 calendar to provide more face-to-face time 2012 that the problems will not only be carefully investi- with management. Last year, in fact, we had Length of Letter gated but their reoccurrence minimized. an attendance rate at board, committee 613 words —Jeffrey M. Cunningham and shareholders’ meetings of 98 per- cent, an extraordinary measure of our “Dad never wavered in his belief that integrity was directors’ dedication. essential. ‘Personal and moral integrity is one of our “We also added a Technology and basic fundamentals, and it has to start with each eCommerce Committee last year to of us,’ he said. With culture and values like these, bring more intensive company there is no limit to the difference Walmart associ- focus on Global eCom- ates can make for shareholders and customers and merce and social and the world we serve around us. mobile retailing. We are “We also are proud of the service of our board leveraging the knowl- members, and of the processes we have in place edge and insights of to serve our shareholders. Good corporate gov- directors who have ernance is good business. As your chairman, I am deep experience and pleased that we continue to strengthen our struc- high expectations in ture and best practices. this area.” l ma rt c o urtesy of iwa Cover Story Annual Shareholder Letters

CD&A Stands for ‘Crisis Discussion also the many thousands of magnificent profes- sionals in every one of our other divisions around And Analysis’ the world. It was a painful decision to shut down News Corp. the News of the World, but it was the right thing “I have always said that the News Corporation ethos to do. is to see opportunity where others see only chal- “…As I write this letter, our Board of Directors lenge.” Instead, in 2012, Murdoch found challenge and senior management are acting decisively to where the media found opportunity. After a five- get to the bottom of what happened. I have asked year investigation by Scotland Yard and Parliament, Joel Klein, who formerly served in the U.S. Justice News Corp.’s CEO was dragged through public Department, to lead our efforts in this matter. He Letter Writer hearings for phone hacking incidents that occurred reports to independent director Viet Dinh, who in Rupert Murdoch, as many as 10 years ago. Heaps of blame and shame turn is having regular meetings with all the other Chairman and CEO were cast, mea culpas offered repeatedly, serial res- independent directors. The Board of Directors and Date oN Letter ignations followed by more investigations and in- the Company have retained independent counsel, As of June 30, quiries, a pie in the face, the folding of News of the and we are cooperating with the relevant authori- 2011 World, the departure of top editor Rebekah Brooks ties in both the U.K. and the U.S. In sum, we have Length of Letter (now facing criminal charges), and then watching taken decisive actions to hold people account- 2,591 words his son, his one-time presumed heir apparent, un- able—and we will do whatever is necessary to pre- dergo withering rounds of questioning. vent something like this from ever occurring again. The 81-year-old patriarchal chieftain under- We will put things right. stood he needed to show the public his convic- “Notwithstanding the difficult chapter repre- tion and his moral compass in order to right the sented by News of the World, I wish to reiterate ship: “Frankly, I am the best person to clean this my enthusiasm for where News Corporation is up.” How does a CEO deal with such storm-tossed today and where we are going. I realize the cur- waves of bad news in an annual letter? Directly, rent flavor of the day is economic pessimism, and forcefully, but all the while placing it within the it is clear that Europe in particular is in the midst logical confines of his company’s enormous global of a period of extreme volatility. However, I am media business. —Jeffrey M. Cunningham optimistic about the future because I believe that News Corporation—the most global of media “As has been widely publicized, our Company has companies with the most compelling content— received a major black eye from the phone hacking will continue to shape it. We are better positioned scandal at our News of the World newspaper in the financially and operationally than we have ever U.K. As I said at a Par- been. Our culture is, and always has been, en- liamentary hearing, trepreneurial. As we proved this past year, News this episode has been Corporation is not the kind of company—and we the most humbling of are not the kind of people—to fear a changing my career. market. “Let me be clear: “Across the world, our 51,000 employees are the behavior carried working every day to discover new and profitable out by some em- ways to create and deliver our content for the

ployees of News of benefit of our stockholders and global viewers REUTERS /J ohn S t i ll the World is unac- and readers. That means looking for—and deliv- ceptable and does ering—the inventive solution where others simply not represent who throw up their hands in despair. Every day some

Rupert Murdoch we are as a Com- new technology up-ends somebody’s old estab- w ell/ P OO L pany. It went against everything that I stand for. lished business model. Our people recognize that That behavior betrayed not only our readers, but as an opportunity.”

34 NACD Directorship July/August 2012 Innovation Drives Giving and Guidance Bill & Melinda Gates Foundation dividuals and families making a simple pledge to give away a majority of their wealth during their Bill Gates wants to change the world. For the lifetime or in their will, has already grown to 69 second time. people, which is more than we expected when we Instead of developing software, this time he wants started. As we began 2012, we heard from several to cure polio, AIDS, world hunger, illiteracy and people who said they plan to take the pledge very contagious infections through family planning, soon. We’re hopeful that many others will follow. education and philanthropy. To fulfill this mission, It’s inspiring to read people’s rationale for making the foundation Gates created with his wife, Me- the pledge; you can find their letters at www linda, has created “the giving pledge.” The pledge .givingpledge.org. Letter writer: Bill Gates, Co-chair requires that wealthy people give away the majority “We brought the group of pledgers together in of their wealth during their lifetime. In effect, Gates May for the first of what will be an annual gathering DATE ON LETTER has become a one-man estate planner for the likes to learn from each other. The event was a great January 2012 of himself, Warren Buffett, Mark Zuckerberg and a success. A lot of people found they had goals in LENGTH OF LETTER number of other billionaires. common, so even as the Giving Pledge celebrates 8,391 words Bill and Melinda Gates traveled with Buffett to the diversity of giving, it has helped spur collabora- India, where they spoke to wealthy industrialists tion. We’re starting to see the fruits of that effort, and entrepreneurs about doing this type of giving as members of the group are now looking at co- in their own country and the impact that it could funding projects. have on the economy. Buffett used the example of “….Unfortunately, many people believe the Santa Claus requiring the assistance of elves to do opposite—that money spent on development his good works, and thus helping to create employ- is wasted, or that it doesn’t get lasting results. ment. It may be a stretch, but who wants to argue ­Melinda and I will spend a lot of time in the coming publicly against Santa? year explaining why they’re mistaken. The rela- —Jeffrey M. Cunningham tively small amount of money invested in develop- ment has changed the future prospects of billions “ …The world faces a clear choice. If we invest rel- of people—and it can do the same for billions atively modest amounts, many more poor farmers more if we make the choice to continue investing will be able to feed their families. If we don’t, one in in innovation. We will repeat seven people will continue living needlessly on the that message over and edge of starvation. My annual letter this year is an over in our speeches argument for making the choice to keep on helping and interviews, and extremely poor people build self-sufficiency. on gatesfoundation. “My concern is not only about farming; it applies org and gatesnotes. to all the areas of global development and global com, because we t ion / M a rt in R Ÿtsc hi health in which we work. Using the latest tools— are convinced that seeds, vaccines, AIDS drugs, and contraceptives, when people hear tes F o u n d a for example—we have made impressive progress. stories of the lives However, if we don’t make these success stories they’ve helped to widely known, we won’t generate the funding com- improve, they want mitments needed to maintain progress and save to do more, not lives. At stake are the future prospects of one bil- less.” lion human beings. “…The Giving Pledge, which entails wealthy in- Co urtesy of t h e Bi ll & Mel in d a Ga

July/August 2012 www.directorship.com 35 Cover Story Annual Shareholder Letters

Special Circumstances we believe will be beneficial for both companies and both stocks. A Change in Strategic Direction “In making this decision, we challenged ourselves to think beyond our established and successful Abbott Laboratories model to create the optimal pharmaceutical and Abbott’s shareholder letter serves as both a report on medical products companies for the conditions of the company’s recent performance and a road map the 21st century. Because of the ways in which inves- for the spin-off of a research-based pharmaceutical tors value these two different models, and because company, along with an introduction to its strategy of their varying capital and investment needs, we and leadership team and a detailed explanation concluded that we would be even more successful in LETTER WRITER: for how this transition will best serve shareholders. the years ahead as two companies rather than one.” Miles D. White, Miles White acknowledges that the future board will Chairman and CEO be instrumental in driving the company’s success— Detailing the Power of Invention DATE ON LETTER: a unique nod to boards’ importance not represented March 2, 2012 in many investor letters. ­—Elizabeth Mullen Amazon LENGTH OF LETTER: The cheerleading you hear for Amazon is from the 2,120 words “…Our strategic actions of the past decade-plus C-suite, where founder Jeff Bezos relies on a tried- have dramatically reshaped and strengthened and-true approach to salesmanship. In the first half ­Abbott. Most recently, we have expanded our pres- of his letter, Bezos lets satisfied customers extol the ence in emerging markets and aggressively rebuilt benefits of Amazon products such as Amazon Web our pharmaceutical pipeline. At the same time, the Services, Kindle Direct Publishing and Fulfillment investment identities and operating models of our by Amazon. Testimonials are followed by his own current medical products businesses and pharma- detailed analysis of the company’s conditions and ceuticals business evolved independently. They now prospects. In addition, Bezos attaches his 1997 letter represent two distinct and compelling investment to shareholders as a reminder that the objectives set opportunities for shareholders. out by him then remain today. —Judy Warner “…This period also saw significant change in our operating environment, including the rise of “…Invention comes in many forms and at many scales. emerging markets and their growing impact on The most radical and transformative of inventions are global business. Abbott’s sales outside the United often those that empower others to unleash their cre- States now exceed those within. At the same time, ativity—to pursue their dreams. That’s a big part of rising global regulatory standards have changed the what’s going on with Amazon Web Services, Fulfillment landscape for new healthcare products. by Amazon, and Kindle Direct Publishing. With AWS, “…These changes in the environment essentially FBA, and KDP, we are creating powerful self-service

LETTER WRITER led each business to pursue distinctly different busi- platforms that allow thousands of people to boldly ex- Jeffrey P. Bezos, ness models. Today, research-based pharmaceutical periment and accomplish things that would otherwise Founder and CEO products have different approval and life cycles, re- be impossible or impractical. These innovative, large- search and development profiles, regulatory envi- scale platforms are not zero-sum—they create win-win DATE ON LETTER April 13, 2012 ronments and geographical market focuses than our situations and create significant value for developers, other businesses. entrepreneurs, customers, authors, and readers. LENGTH OF LETTER “…As a result, these two halves of today’s “Amazon Web Services has grown to have thirty 3,593 words, ­Abbott have moved in very different directions different services and thousands of large and small including the first with equally different demands and priorities and businesses and individual developers as customers. shareholder letter from 1997 are already functioning as separate, highly suc- One of the first AWS offerings, the Simple Storage cessful businesses. Acknowledging this, with the Service, or S3, now holds over 900 billion data ob- creation of two independent companies, helps jects, with more than a billion new objects being clarify for investors each business’ value, which added every day. S3 routinely handles more than

36 NACD Directorship July/August 2012 500,000 transactions per second and has peaked at actions to reignite direct-selling momentum; cut close to a million transactions per second. All AWS costs; strengthen cash flow; and improve overall services are pay-as-you-go and radically transform operating and management effectiveness. capital expense into a variable cost. AWS is self-­ “By far our most critical priority is to accelerate service: you don’t need to negotiate a contract or top-line revenue growth. In 2011, we saw strong engage with a salesperson—you can just read the on- ­direct-selling performances in a number of key line documentation and get started. AWS services are markets, most notably Mexico, where we delivered elastic—they easily scale up and easily scale down.. double-digit growth and gained share against our “…I am emphasizing the self-service nature of competitors. Our focus now is on driving similar suc- these platforms because it’s important for a reason cess in our other top markets. In the U.S., for example, I think is somewhat non-obvious: even well-meaning we are seeing some early encouraging signs of prog- LETTER WRITER gatekeepers slow innovation. When a platform is ress, with gains in mass market Beauty share this last Andrea Jung, self-service, even the improbable ideas can get fourth quarter for the first time in three years.” Former CEO and now tried, because there’s no expert gatekeeper ready to Chairman say ‘that will never work!’ And guess what— many of New Beginnings DATE ON LETTER those improbable ideas do work, and society is the March 2012 beneficiary of that diversity.” Exelon LENGTH OF LETTER The public utility company’s letter comes on the 1,153 words Jung’s Last Stand heels of a merger with Constellation Energy in 2011 and is authored by a chairman and CEO who Avon is set to retire in 2012 after 11 years at the helm. After 12 years at the helm, Andrea Jung turns the John Rowe’s letter to shareholders demonstrates annual shareholder letter into a candid request for management’s commitment to the company and investor patience, writing that a new CEO—un- highlights how Exelon subsidiaries PECO and named at the time the letter was published—would ComEd weathered storms, hurricanes and snow in address challenges that have slowed recent revenue a slow economy. —Cheryl Soltis Martel growth. Few CEOs would have the courage and candor to confess that a company’s challenges have “…Exelon believes in market-based solutions to grown so complex they require fresh thinking, and ­energy supply issues. Much of Exelon’s competitive withstand the urge to hypothesize about them or advantage and underlying value rests on the prin- simply blame them on the larger global slowdown. ciples of competitive markets and clean energy. LETTER WRITER While acknowledging the search for a successor, “We continued to advocate in state and federal John W. Rowe, Jung writes that any major, long-term decisions will jurisdictions for competitive markets. Properly regu- Chairman and CEO be delayed until the new CEO is on board. Not all lated open markets, shaped by customer choice and DATE ON LETTER was doom and gloom, however. Jung predicted that accurate price signals, will promote a clean, reliable Feb. 22, 2012 the launch of a new product line would become energy supply. Our involvement in the Ohio com- one of the largest in Avon’s history. —Judy Warner petitive market settlements in 2011 will help open LENGTH OF LETTER markets for us. 1,380 words “…Looking ahead to 2012, we are moving for- “…Our largest growth initiative of 2011 is, of course, ward with urgency to get the company back on the merger with Constellation. It will create the largest a growth track as quickly as we can. In line with competitive integrated energy provider in the country, this, we have undertaken a full long-range opera- bringing together complementary businesses into a tional and financial review of the business, eval- solid platform. The combination aligns Exelon’s large, uating all external and internal factors that are clean generating fleet with Constellation’s leading ­impacting our performance. While we’re delaying commercial business, providing a larger retail channel- any major, long-term strategic decisions until a to-market and capturing the advantages of scale in new CEO is on board, we are taking immediate both operations and economics.”

July/August 2012 www.directorship.com 37 Cover Story Annual Shareholder Letters

Confronting a Difficult Past IPO Fast Lane Hewlett-Packard Zipcar Writing a letter to shareholders for the first time as As if running an Internet company is not enough a new CEO can be daunting, but when a company of a thrill, having several billionaires on your has faced a scandal, resignation, as well as an un- board—Meg Whitman, Steve Case and Bob predictable economic recovery, stiff competition Kagle—can’t be an easy audience for a PowerPoint and natural disasters, it may seem downright ter- presentation. The implosion of the Groupon and rifying. Meg Whitman steps up to the plate with Facebook IPOs should concentrate the mind of confidence, addressing the company’s obstacles the average CEO even further. Yet Scott Griffith LETTER WRITER directly and immediately, and avoids glossing over is no average CEO. Meg Whitman, CEO what she admits is less-than-stellar financial per- Despite the challenges of managing as dynamic DATE ON LETTER: formance. She acknowledges that HP failed to a company as Zipcar, even with the competi- As of Oct. 31, 2011 “clearly articulate our direction” when it came tive pressures building up from Hertz’s new car- LENGTH OF LETTER to announcing changes within the company, sharing service, he manages to find the right tone 1,703 words including the acquisition of software company of awe, dependability and innovation that makes Autonomy. a young Internet company seem like a long-term While explaining that the 2011 financial results player, exciting to its engineers and capable to its were a mixed bag, Whitman also emphasizes the shareholders. core of the HP brand as “the world’s largest provider —Jeffrey M. Cunningham of information technology infrastructure, software, services, and solutions to individuals and organiza- “…With our compelling ‘Wheels When You tions of all sizes.” Want Them’ value proposition, Zipcar offers Ultimately, her letter carries the ring of truth and on-­demand, self-service access to a network optimism—that times may be tough, but better days of ­vehicles where and when people need them for HP lie ahead. ­—Elizabeth Mullen without the costs and hassles of ownership. In addition to the savings we provide to our mem- “…While I’d like to say that we’re through the tough bers—an average of $600 per month—we provide times, many of the fiscal 2011 headwinds are still with a significant environmental benefit, with every us as we enter fiscal 2012, and our near-term focus is Zipcar taking 15 personally owned vehicles off on stabilizing the business. I’ve characterized 2012 the road. Moreover, our members tend to drive as a rebuilding year in which we will be doing the less by making their transportation choices by the hard work that will position us to pursue consistent, trip, relying on a mix of options including Zipcar, LETTER WRITER profitable, long-term growth. We expect that fo- walking, taxis, biking and public transit. Scott Griffith, cusing on the fundamentals and building a stable “…In the new world of urban mobility, we envision Chairman and CEO platform will drive revenue and earnings growth for a future where car sharing members outnumber car

DATE ON LETTER years to come. owners in major cities around the globe. That may As of Dec. 31, 2011 “Over the long term, I expect HP to be a GDP- be a bold statement, but we see it as only a matter of type growth company that can grow revenue inline time. We estimate the addressable global market for LENGTH OF LETTER with or better than our markets, expand earnings car sharing to be over $10 billion and we believe car 2,352 words faster than revenue and produce consistent cash sharing is still in the very early stages of adoption, flow. We intend to deploy a balanced capital al- even in our largest existing markets. location strategy, investing in our businesses “…As we do this, we see the world rapidly through a combination of capital expenditures moving in the direction of the vision we articulated and acquisitions, and returning cash to stock- many years ago, thanks to compelling and favorable holders through a mix of share repurchases and trends in consumer behavior, technology and gov- dividends.” ernment policy.” D

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