The shareholder letter paradox.

• Author: RITTENHOUSE, LAURA
• Position: Brief Article

Looking for -- and not finding -- traces of leadership in the annual shareholder letter.

IN FOUR YEARS of surveying shareholder letters, we've seen the good, the bad, and the quickly forgotten -- unfortunately, most of them falling in the latter categories.

It's a matter of attitude. Too often, the people writing these letters fail to recognize the letter as an opportunity to speak directly to a number of important groups. And, often, we have heard the letter discounted:

-- "The letter isn't important."

-- "The people we care about already know us."

-- "It doesn't really matter what we write; no one pays attention."

-- "This is a letter to investors. I don't care if our employees read it."

No wonder the shareholder letter has become for many people one of the last places they look to find a balanced and clear picture of a company. Yet when it is well written, it is a piece that not only discloses information, but also can reveal a company's soul.

Our yearly research of the letters of 100 top-rated companies has determined that only about one-third of companies are writing letters that educate and engage readers. What distinguishes these companies? They have shifted from writing in a narrow and legalistic voice to one that is comprehensive, detailed, and dynamic.

This emerging voice reflects the importance of shareholder letters as a leadership document. In an environment where past results are no longer a reliable indicator of future performance, the annual report letter is viewed as a unique statement of vision and personal accountability. While some writers of shareholder letters may try to target a letter to a specific audience, a well-written letter can provide a window into the company for many audiences, including employees, customers, suppliers, and shareholders.

We believe that when CEOs see the benefit of using the shareholder letter to fully express their leadership goals and intentions, they will begin to master this essential communication.

Recognizing Wall Street's increasing focus on leadership as a factor in equity valuation, we developed the Language Works model which systematically analyzes and ranks leadership language in chief executive letters. Like an annual physical, it gives companies an opportunity to evaluate their strategic and communications fitness. The analysis identifies and contrasts straightforward language such as goals, cash flow, results, awards, and business opportunities. It also looks for evidence of...