Regular readers know I’m a big fan of the section of annual reports that many investors ignore: the CEO’s annual letter to shareholders. In my view, the letter is a CEO’s best opportunity of the year to communicate with key constituencies such as shareholders, employees, and customers. Most CEOs don’t make the most of their opportunity, but some do. A small minority deliver an all-star performance.Why so few CEOs give so little attention to the letter is a mystery to me. Too often, the effort is turned over to the P.R. department and the result is cliché-ridden pap. As I say, a missed opportunity.To me, an outstanding letter has three distinct elements:
1) Honesty. The best letters present a candid assessment of the company’s performance and its outlook, the bad as well as the good. Unfortunately, too many letters have “Washington D.C.” style honesty.
2) Tone of the CEO. When I read a shareholder letter, I want to hear the CEO’s true voice come through. I don’t expect most CEOs to actually write their own letters (although some clearly do; I wish more would), but I at least expect them to participate in the process enough so that some of their own phrases and syntactical tics make their way into the final product.3) True Insight. The best letters offer insight into the performance of the company (including how and why the results came about the way they did), the company’s strategy, and the way the company is managed.
Not all the letters are out (I’m waiting patiently for the letter from Wintrust’s CEO, Ed Wehmer, a particular favorite), but some are. Here are my early thoughts: Observation #1: The best letters are written by CEOs who’ve made it a habit through the years to be deeply involved in the development process. The effort shows. If you want to read four great letters in particular, I suggest these: Credit Acceptance Corporation (CACC), Glacier Bancorp (GBCI), JPMorgan Chase (JPM), and M&T Bank Corporation (MTB). Year in and year out, the CEOs of these four companies deliver the goods. What’s incredible is the number of times they’ve done it: Jamie Dimon (JPMorgan Chase) has for 14 years, Mick Blodnick (Glacier), 16 years, Don Foss (Credit Acceptance), 22 years, and Bob Wilmers (M&T), 30 years! In fact, I told Bob Wilmers his effort this year was his best ever! I may be the only one to notice, but I truly appreciate the time and thought these CEOs put into their letters each and every year. Observation #2: I did find Warren Buffett’s letter this year disappointing. Let me quickly add that I still thought it was an outstanding read, just not up to the standard we’ve all set for him as the CEO who perennially writes best, most readable letter of the year. Observation #3: The best letters are written by CEOs of superior, well-run companies. I can’t remember an instance (which doesn’t mean it hasn’t happened) of reading an outstanding letter to shareholders from the CEO of a mediocre company. Observation #4: Financial services CEOs should do more in the way of explaining. What makes Jamie Dimon’s, Don Foss’, and Bob Wilmers’ letters stand out are the common-sense explanations they provide about key issues that affect their companies. This year,Wilmers’ discussion of GAAP accounting and cash flows, Foss’ discussion of cyclical and competitive cycles, and Jamie Dimon’s detailing of the various costs of compliance all stand out.For example, virtually no bank CEO tries to explain why his company is operating at an optimal capital level, or explain, either, how to measure the adequacy of the bank’s loan loss reserves. Nor do many bank CEOs provide much discussion about balancing risk and reward in concert with profitability and growth. Observation #5: I’m always interested to read what CEOs have to say about board members and employees. This is where the hogwash meter often jumps to 110. (“Our employees are our most valuable resource blah blah blah.”) Hey,CEOs! Don’t you think we can tell it’s usually gratuitous? But when it’s not gratuitous, it shows. Notice where and how often Bob Wilmers discusses his employees in this year’s letter. Observation #6: Returning capital to shareholders shouldn’t be so wildly celebrated. As a shareholder of a company earning, say, 12% or more on its equity, I’d much prefer that the company had sufficient growth opportunities to invest internally and generate capital at that level or higher.Returning capital to shareholders via dividends or share repurchases is an implicit admission that the company doesn’t have attractive investment opportunities. In that case, returning capital is clearly the right option, but let’s not celebrate it. Observation #7: No one seems to know a bank’s optimal asset size is. Letters this year from CEOs of banks from $1 billion in assets to $100 billion all claim to be operating in the sweet spot of bank size. They can’t all be right-and few provide much in the way of supporting evidence. In my opinion, it’s not the bank’s size, but its strategy and management actions that are always the key determinant of success.I love annual shareholder letter season. I get to review companies I know, as well as learn new information about them. I also get to gain insights into other companies I don’t know well. I just wish more CEOs would seize on this incredibly significant communication opportunity.What do you think? Let me know!