The annual report theme was selected to help stakeholders understand the organization’s direction and bring to life operational and sustainability achievements in 2010 through a series of stories. Among these was the experience of a young business member who had a dream to build an upscale tattoo studio featuring the work of classically trained artists. Not exactly the type of business you’d expect a financial organization to use to portray how it operates, but then First Calgary Financial doesn’t do business as usual.

Describing First Calgary Financial as “cleverly inventive and resourceful,” the Credit Union Executive Society recently honoured the credit union with an award of merit for marketing excellence for its 2010 annual report. Over 500 credit unions from across North America competed for recognition in 27 categories for the 36th annual Golden Mirror competition. All projects were judged on their ability to convey examples of exceptional creativity, unique perspectives and audience engagement.

This was the fifth annual report I’ve written for First Calgary Financial and the third to be recognized for corporate reporting or marketing excellence. As with past reports, I was delighted to work with the First Calgary communications team and Deschenes Regnier, one of Western Canada’s leading communication, design and marketing firms. First Calgary Financial is the ninth largest credit union in Canada and has been named one of Canada’s 50 Best Managed companies for 11 consecutive years by the National Post.

The tattoo studio, meanwhile, is a thriving and award-winning business.

What’s the secret sauce for annual reports? Like good pizza, it usually boils down to keeping things simple. As Leonardo da Vinci proclaimed, “Simplicity is the ultimate sophistication.” I’m not sure what Leonardo would say about annual reports, but keeping them simple these days is a challenge.

Rising demands for more disclosure and the integration of sustainability reporting are among several factors making annual reports ever longer and more complex. Unfortunately, too many annual reports are choked with low-quality information, disconnected content and boilerplate, all of which obscures key messages.

Clear, crisp communication, on the other hand, is a sign of strong leadership. It’s also an opportunity to improve engagement and dialogue with stakeholders. Let’s look at four techniques for cooking up a good annual report.

Focus on strategy

You can structure a report in any number of ways. But describing your strategy – and perhaps even illustrating it – at the front of the book provides a means to underpin the rest of the narrative.

Start by summarizing the main elements of your strategy, highlighting corporate goals, performance indicators – both financial and non-financial – and strategic priorities. This will unify the report, creating a clear story and consistent message from cover to cover. It also helps organize the copy into sections that readers find easy to comprehend.

Cut the clutter

Regulations are a big source of clutter. If it’s required, it goes in the report. But that doesn’t mean it can’t be managed.

Clutter usually crops up in two ways. Immaterial narrative and repetition, such as that found in financial notes and disclosures, often reduces a reader’s ability to identify and understand relevant information. Plus, it can be annoying. Explanatory information that remains unchanged from year to year, such as policy and procedures, often provides little value to readers.

The annual report preparer is always faced with a smorgasbord of content. Rather than use all of it, you need to continually make choices about the value of content. If there’s no compelling reason to add it, leave it out. If you must include it, you can eliminate or reduce duplication by cross-referencing to other sections in the report or pointing readers to a corporate website for more detail.

The goal is to explain performance in a meaningful way while avoiding excessive or meaningless detail that obscures key messages. Less clutter equals more impact.

Sum it up

The traditional three-part business writing model looks like this: introduction, body, conclusion. Unfortunately, that doesn’t work well in an annual report. People tend to read only the initial part of any piece of content. So your essential messages may be missed if they’re buried at the end of a section.

To get readers to read beyond the opening, you must convince them of the content’s value. A better approach is to combine the conclusion and introduction. Or start with a few highlights. In other words, put the bottom line on top. By developing an interesting and informative lead, you’ll pull your readers into the story.

Similarly, tables, charts, callout text and other graphic elements help tell your story visually and at a glance.

Speak plainly

Stakeholders aren’t always familiar with the jargon and terms of your business and industry. The same is true with acronyms. Even if these are clearly identified, overusing them overloads a reader’s ability to comprehend meaning quickly.

Plain language, on the other hand, minimizes the effort required to understand relevant information and key messages. It also reduces often imperceptible hesitations that readers experience as they search for meaning.

I’m a big fan of simplicity in annual reports and, for that matter, pizza. Simplicity is an often overlooked yet powerful strategy for keeping content clear and informative. The objective is to communicate simply, not simplistically, by using structure, brevity and language to convey your messages clearly. That, in my opinion, is the recipe for a good annual report, whether it’s thick or thin.

Bringing investors in from the dark

A new global study is calling for businesses to give a truer account of company performance or face losing stakeholder confidence.

In its agenda for debate PwC, the Chartered Institute of Management Accountants and think tank Tomorrow’s Company warn the days of measuring performance by profitability at the exclusion of other outcomes are ending.

“A sea-change in global trends means non-financial reporting is growing in importance,” says PwC’s Auckland Managing Partner Michele Embling.

The study – Tomorrow’s Corporate Reporting: A critical system at risk – says current corporate-reporting standards are rooted in a 150-year-old “take, waste and make” approach to business. It challenges industry bodies to develop an integrated reporting system to better meet today’s “people, planet and profit” needs.

The corporate reporting system of the future should:

• Encourage innovation and change – through collaboration so that trust in the corporate reporting, and between participants, is maintained.
• Balance judgement and compliance – create a reporting system that encourages companies and professions to lift their sights beyond merely complying with externally laid-down requirements.
• Support company decision making – by focusing on the key drivers of long-term value – and their associated risks.
• Make reporting accessible, timely and relevant – encouraging companies to communicate everything that is material to their present and future success in a clear way.
• Support shareholder and investor decision making – by allowing them to compare the prospects and performance of companies and assess their long-term sustainability and value-creating capabilities.

Investors call on companies to embrace ESG issues

More than two dozen major institutional investors, collectively managing $1trn in assets, have asked the Russell 1000 companies to actively embrace the “new reality” of ESG risks.

The investors, including the two largest public pension funds in the US – the California Public Employees Retirement System (CalPERS) and California State Teachers’ Retirement System (CalSTRS) – called on companies to address environmental, social and governance issues in both their actions and investor disclosures.

“Environmental and social sustainability issues can no longer be considered off-balance sheet issues,” wrote the investors. “Rather they are material, financial issues posing both risks and opportunities to the long-term success of corporations.”

The letter comes on the heels of CalPERS and CalSTRS making formal public commitments last month to better integrate ESG factors across all their investment decision-making.

The letter was also signed by state treasurers and comptrollers from New York, Illinois, California and Connecticut, plus the AFL-CIO and Laborers’ International Union of North America (LIUNA), and several church-based investment funds.

Ceres President Mindy Lubber, whose investor/business/public interest coalition organized the signatories, said mainstream investors like these can no longer stand still while companies their clients depend on fail to see these wide-ranging risks.

“We’ve seen enough hidden financial risks with globally-damaging economic results in recent years,” Lubber said. “The collapse of financial markets, the BP oil spill, the Massey coal mine disaster and other mishaps make clear it’s time that companies operate with a clear view of all their risks and costs – but also the tremendous opportunities open to those businesses across all sectors who compete by developing solutions to environmental and social issues.”

More companies opt for hybrid online reports

FTSE 100 companies are increasingly opting for hybrid online annual reports that combine HTML and PDF or Excel sections, according to new research from Radley Yeldar.

The consultancy finds that 37 companies produced hybrid online reports this year, up from 28 in 2010, making hybrids the most popular option among UK blue chips.

Hybrid reports use HTML for the front section, while making the accounts at the back available as a PDF or Excel download. The number of full HTML reports, by comparison, fell from 45 in 2010 to 33 this year.

The trend away from full HTML and toward hybrid reports has been going on for two years now, explains Elizabeth Edwards, a corporate reporting consultant at Radley Yeldar.

“There was a rush into online annual reporting and a lot of people went straight into full HTML, and I think they are starting to reconsider how to actually get the best return on investment,” she says. “It’s about people thinking through whether they are better off allocating their budget to the front end and providing the back end in a downloadable form.”

Wharton Professor of Management Witold Henisz has found a way of measuring the benefits of stakeholder engagement activities to public mining companies that operate in risky environments. Henisz and two co-authors researched the role that stakeholder events played in companies’ efforts to maximize profits. The answer: huge.

As Henisz notes in a paper entitled Spinning Gold: The Financial Returns to External Stakeholder Engagement, “There is a powerful business case to win the hearts and minds of external stakeholders. We found in our research that the value of the relationship with politicians and community members is worth twice as much as the value of the gold.”

The authors used data from 26 gold mines owned by 19 publicly traded firms between 1993 and 2008. By coding more than 50,000 stakeholder events from media reports – by hand, no less – the researchers developed an index of the degree of stakeholder cooperation or conflict for these mines.

Stakeholders, for the purposes of the research, includes everyone from local and national politicians and community leaders to priests, war lords, paramilitary groups, NGOs and international bodies like the World Bank. A stakeholder event includes actions or expressions of sentiment from groups friendly and not-so-friendly towards mine owners. The authors note that because mines are so big, whoever the politically relevant stakeholders in an area are, they often take sides because so much money and so many jobs are at stake.

Henisz and his colleagues reviewed data of gold mining firms listed on the TSX to calculate the net present value of their mine. That value was then compared to the company’s market valuation. The result: the companies traded at a 72% discount compared with to their net present value. Why? Because the net present value did not take into account the probability of delays or disruptions, and the cost overruns or revenue shortfalls that result.

By incorporating the stakeholder cooperation index in a market capitalization analysis, the researchers reduced the discount placed by financial markets on the net present value of the gold from 72% to between 33% and 12%.

Getting with the program

The research quantifies what a number of mining firms have already realized – that reducing conflict with external stakeholders in favour of winning their cooperation improves the companies’ chances that a mine plan can proceed on budget and on time, and most importantly, generate sustainable shareholder value.

“Fifteen billion dollars of gold sitting in a mountainside cannot be transformed into [profits] with financial, engineering and marketing inputs alone,” comments Henisz. “It also requires the political and social support of key stakeholders, including not only members of the economic value chain, but also government officials, regulators, community leaders and members of civil society.”

A quote from the COO at one of the mines in the researchers’ sample puts it another way: “It used to be the case that the value of a gold mine was based on three variables: the amount of gold in the ground, the cost of extraction and the world price of gold,” he states. “Today, I can show you two mines, identical [in term of] these three variables, that differ in their valuation by an order of magnitude. Why? Because one has local support and the other doesn’t.”

The findings are applicable to a number of other industries, according to Henisz, including construction, oil and gas, agriculture, minerals, alternative energy and water – any sector that involves large building projects, substantial upfront investments and long payback periods. “If companies want to maximize their profits, there is a degree of stakeholder engagement that they have to undertake.” Those able to recognize the need for sophisticated stakeholder strategies, he adds, “will find this to be a source of competitive advantage.”

Applying best practices

Henisz recommends the following best practices for businesses that are serious about engaging stakeholders:

1.     Change the mindset of the company so that employees across the board believe that stakeholders are important.

2.     Get the necessary data to explain who the stakeholders are, what they want and who is connected to whom.

3.     Find a way to link data to operating performance, integrating the information into risk management systems rather than treating it as a separate category.

4.     Interact with stakeholders in the community in a genuine and fair manner; respond to their concerns and form connections rather than just writing a check.

5.     Find a way to disseminate information about the ongoing project that is credible and transparent.

The links between perceptions of social responsibility and market valuation vary across industries and countries. Their existence, however, is ubiquitous. Today, the social license to operate is more than rhetoric. It is measurable and strategically relevant.

Establishing standardized sustainability ratings

Sustainability ratings have been used for more than a decade to measure the social equity and environmental stewardship of companies and their major investors. The proliferation of ratings providers, however, has spawned inconsistent and often opaque approaches.

Ceres and Tellus Institute have launched the Global Initiative for Sustainability Ratings, an initiative for a single standard for rating the sustainability performance of companies. The two organizations say now is the time for an independent, non-commercial framework. Such a system, they say, will unleash the full power of ratings to drive sustainability deep into capital, procurement and consumer markets.

Company ratings already play a pivotal role in determining access to capital – and its cost – for public company stocks and bonds. But in some instances, conflicts of interest have developed among raters and rated companies. Plus, a recent study noted widespread “survey fatigue” among companies responding to information requests by multiple raters. These conditions have led some companies to “cherry pick” results that are most favourable while sidestepping less favourable ratings. Investors, meanwhile, are seeking a standard framework to help them evaluate companies.

Founding partners of the new coalition include leading investors and businesses like TIAA-CREF, the Calvert Group and Bloomberg. The initiative will be modeled on the Global Reporting Initiative, which has become the de facto global standard used by 2,000 companies worldwide for corporate reporting on environmental, social and economic performance.

Improving ESG reporting through dialogue

Improving the value and efficiency of environmental, social and governance (ESG) reporting will require more collaboration between companies and researchers, according to The National Association for Environmental Management (NAEM) report, Driving ESG Reporting Progress through Dialogue.

“In the future, public sustainability disclosure will not be limited to leadership companies,” said NAEM Executive Director Carol Singer Neuvelt. “Business leaders need to learn more about the emerging field of ESG research and develop a strategy for responding to the growing number of information requests.”

The report’s recommendations for improving the ESG research process include:

• identifying the metrics and financial benefits that are material to a company’s sustainability progress
• improving research methods to better reflect differences between industries and company business models
• building stronger relationships between business leaders and ESG researchers to ensure more accurate, efficient and timely reporting and to develop a clearer value proposition for ESG reporting
• increasing the availability of sustainability information through websites, annual reports, GRI reports and integrated reporting

Neuvelt said NAEM plans to pursue continued dialogue with the ESG research community through its Green Metrics that Matter project, an endeavour to identify the sustainability metrics that yield the most business value.

The full report is available at http://www.naem.org/page/ESG.

That may sound easy enough. But the corporate reporting system isn’t just about financial and operating numbers. It’s also about people who have different views about the purpose and value of corporate reporting, especially annual reports.

Alive and well in the US?

In 2009, for example, 81 of the Fortune 100 companies published an annual report, or at least something slightly more interesting than a Form 10-K, even if that something was nothing more than a cover. That statistic prompted a US marketing company executive to pronounce the annual report alive and well. But is it? Recent surveys and reports from Canada and the UK suggest exactly the opposite when it comes to the value and future of the annual report and corporate reporting.

Canadian investors ambivalent

A survey of Canadian investor relations officers (IROs) and professional investors (Pros) by Toronto-based Equicom Group, a subsidiary of TMX Group (which also owns the Toronto Stock Exchange) raised serious questions about the value of annual reports. When asked about the value of various investor relations tools, only 7% of IROs considered the annual report the most valued communication tool, compared with 8% of the Pros. An even higher percentage of both groups ranked the annual report as the least valued tool: 16% of the Pros and 14% of the IROs.

Investor presentations and press releases are the communication tools most valued by both groups. Why? Because they provide time information better suited to investor needs. In Canada, then, the annual report isn’t alive and well: it’s on life support.

UK audiences losing interest

In the UK, a report from PwC, Tomorrow’s Company and the Chartered Institute of Management Accountants warns of risks to the corporate reporting system, which includes annual reports. The group found that the corporate reporting system is a jigsaw in pieces, with no single participant controlling the process of fitting it together.

Those participants rarely share the same view of the purpose of corporate reporting, in part because of disparate mindsets and agendas. Moreover, they usually resort to bolting on more disclosures rather than refreshing or rebuilding the reporting model based on what’s material.

As one study participant commented, “Our impression is that investors have lost interest in the annual report as it is too lengthy and full of ‘compliance’ rather than information that the entity or the investors consider ‘need to know’.”

Depending on who you listen to, then, the annual report is either alive and well, nearly valueless or a dressed-up knuckle-dragger, unable to cope with the demands of the Information Age.

Cutting clutter to simplify communication

Let’s look at one area that can prevent investors from being buried in an avalanche of information. And that is cutting clutter, especially in governance and risk management sections, which are both big contributors to boilerplate and other “explanatory information”.

1. Filter out the noise

One reason investors don’t read annual reports is that they are filled with legal, accounting and technical jargon. Consequently, it takes investors too long to find and extract relevant information. It’s an accessibility problem that’s common to print and digital reports. Except for the professional investor, the reports are often too burdensome to use.

So consider a plain language review of the notes to the financial statements, and management’s discussion and analysis, to cut both jargon and length. Ask your corporate governance committee if it’s willing to remove static governance information from the report. And if you can’t cut it or reduce it, find ways to highlight what’s new or changed from the previous year.

2. Forget the nuts

We’re all familiar with the “may contain nuts” warning on some food product labels. Similar all-encompassing warnings in risk disclosure are of no value to investors. Concentrate, instead, on summarizing principal risks that are specific to your company and the strategies for managing those risks. Consider cross-referencing to your website for more in-depth discussion of risk management. And avoid discussing immaterial risks. All this does is to undermine the overall quality of the report by adding useless material.

3. Reduce the creep

The annual report is overlain with a web of detailed rules and standards that can obscure key messages and important information. Combine those reporting requirements with the opinions of accountants, lawyers and other stakeholders, and the result is predictable enough: reporting creep. Simplicity nearly always suffers under the pressure of deadlines, with material more likely to be added than eliminated.

You can cut this creeping inclusion by starting early, debating the merits of contentious lengthy sections and finding ways to comprise. You won’t win all the battles. But there’s still a vast amount of complexity that can be eliminated or reduced.

It takes real determination to shift the reporting focus from compliance to end users by looking for simple, elegant ways to communicate. If, however, you want to evolve your annual report and corporate reporting, I suggest you think like Leonardo da Vinci, who said, “Simplicity is the ultimate sophistication.” Your audience will thank you with a Mona Lisa-like smile.

Despite this vast amount of work, or perhaps because of it, the annual report isn’t the star player it once was. The majority are too complicated, too long, too late and too retrospective to be the sole source of information for investors. Still, they play a valuable role filling in the details of earnings releases, introducing a company and providing a window on management.

Short of starting from scratch, we’re stuck with the beast. But that doesn’t mean annual reports can’t be improved, especially the narrative sections. With trust and transparency now as important to stakeholders as products and services, the quality of that narrative has never been more important. Here then are five ways to improve the narrative quality of your next annual report.

1. Speak with one voice

Annual reports are a collaborative effort that draws on contributions from a people with a broad range of operating and reporting focuses. It nevertheless tends to be a compartmentalized process. Challenge yourself to find ways to stitch together these disparate contributions into a document that speaks with one voice, integrating management and the information that it reports, to deliver coherent, consistent messaging.

2. Make it shorter

Repetition may be effective in advertising, but that’s not the case with corporate reporting. Once is enough. Don’t duplicate when you can cross reference. And find ways to eliminate boilerplate. At the same time, give investors more of the things that are important to them, such as strategy, cash flow, acquisitions, debt and market conditions.

3. Make it real and relevant

The look and feel of your report should reflect the culture of your organization, its purpose and the values that drive it. Set the tone from the top. Is your company straight to the point? A bit quirky? Don’t be afraid to show your true personality. And tell your audience what you’re thinking, not what you think they want to hear. And provide relevant information—the same that management uses—so your audience can assess the performance of the business and its various segments.

4. Connect the dots

Make it easier for your audience to see the big picture by putting performance in context. Explain what drives success by explaining what your goals are and how you plan to achieve them. What is your business model? Show how your governance is effective in creating sustainable value and not just a box-checking exercise. Don’t just pay lip service to environmental and social reporting—integrate genuine, meaningful reporting on matters that are important to stakeholders and society.

5. Give it backbone

Half or more of annual report content is non-financial information and narrative. Unfortunately, much of this material lacks substance, with the worst reports offering little more than marketing copy or tired good news stories. Give your report a backbone by structuring it around of four narrative elements: market overview, strategy, value drivers and performance.

Even though not much is new in the world of annual reporting, don’t let tradition stop you from being creative. Dare to walk the narrow line between consistency and change. It’s okay to improvise or adapt narrative techniques or elements used by others so long as they fit your messaging platform and provide meaningful content.

The goal is to tell a credible and memorable story. With thousands of public companies and millions of investors, you simply can’t afford weak, confusing or complex messaging. What you need is a compelling story that clearly links business strategy and key performance drivers. And builds investor confidence with its credibility.

Benefits of integrated reporting

In a recent story on integrated reporting in Financial Executives International, PwC suggests that every management team needs to put themselves in the shoes of a skeptical outsider, such as an investor, new recruit, customer or supplier.

If done well, integrated reporting can secure capital and credit, help win the war for talent and build strong business relationships.

To gain the benefits of external integrated reporting, PwC suggests asking yourself the following questions:

• Are key components of what makes my business successful missing from our reporting?
• Would I invest in my company based on what is presented externally?
• Is the market value of my company a fair reflection of the business?
• Does the quality of our reporting make us more vulnerable than peers to a hostile takeover bid?
• Does my company’s reporting show clear alignment between strategy, remuneration and key performance indicators?

Transparency: It’s not about giving away secrets

Transparency is playing a bigger role in corporate reporting, as companies seek to meet investor expectations for more comprehensive reporting. However, the concept is still misunderstood by some.

“The notion of transparency strikes some people as giving away the company secrets,” says Michael Krzus. “But it’s about providing more clarity, about how and why you make the decisions you make.”

Krzus is co-author of One Report, Integrated Reporting for a Sustainable Strategy, along with Robert G. Eccles, senior lecturer of Business Administration at Harvard University.

Krzus suggests that the model by which companies report to stakeholders has not evolved since the Great Depression, when the value of property, a plant and equipment were the measurements of critical assets.

Today, that equation is far more complicated, as analysts give greater value to intangible assets, such as quality of management, new products in the pipeline, market share and who the company is competing against.

Integrated reporting, says Krzus, explains to shareholders how a company is creating value for shareholders and society, while juggling challenges both short-term and long-term. Just as important, integrated reporting explains the tradeoffs of financial and non-financial issues.

“By having more robust information, it’s going to allow for better decision making. That’s a benefit on both sides,” add Krzus.

[Source: BusinessFinance]

Enough already?

“Investors always want more, and more, and more,” said Baroness Kingsmill, former deputy chairman of the UK’s Competition Commission, commenting on the future of company reporting.

So how can you capture a reader’s attention and communicate clearly and effectively in the MD&A? The answer is to utilize the same tactics and tools that make annual reports informative: clear language, logical structure and effective presentation. Together, these ensure that the MD&A is as interesting and engaging as it is understandable.

Plain and simple, yet effective

In my last article, I wrote about Warren Buffett’s famously open and honest shareholder letter in Berkshire Hathaway annual reports. The highly effective writing style used in that letter doesn’t stop at Buffett’s signature line. Berkshire’s MD&A is equally communicative.

The tone of Berkshire’s MD&A is different – it’s more matter-of-fact – but readability doesn’t suffer because of it. Why? Because, like the shareholder letter, the writer – who I assume is not Buffett because he surely has better things to do – has used an active voice, plain language and personal pronouns. So rather than the typical “the Company” or “the Corporation”, the MD&A speaks directly to the reader by referring to “our business” and “we conduct.”

While good graphic design also improves readability, you won’t find a shred of it in Berkshire’s annual report. And there’s nothing resembling a theme, except perhaps the utter rejection of one. But that approach works. Indeed, the report’s clutter-free, straight-to-the-point style reflects Buffett’s public persona.

Get out of the rut

With the MD&A increasingly viewed as a critical component of a company’s story, the challenge is to make it an interesting read. Berkshire’s MD&A includes a couple of elements that add interest by breaking from tradition and providing valuable information.

First, it includes an “An Owner’s Manual” for shareholders. Originally published in 1996 and regularly updated, this five and a half page booklet explains Berkshire’s broad principles of operation. Second, the MD&A includes a copy of a two-page memo from Buffett to Berkshire Managers (“The All-Stars”). The memo discusses the need to zealously guard Berkshire’s reputation and succession planning (the manager’s, not Buffett’s).

These two elements help keep the MD&A fresh and interesting. Other companies, however, use the same boilerplate year after year. The MD&A should fully reflect today’s reality, not yesterday’s. Things change. So get out of the rut of repeating language from previous years and get into a new groove with new content.

Integrate from cover-to-cover

Integrated reporting that combines required financial reporting with voluntary corporate social responsibility (CSR) reporting has become a hot topic of sorts lately. However, a more fundamental form of integration is required before CSR reporting gets added to the mix. And that’s integrating all components of the annual report – operational, MD&A, financial statements and theme material – to create coherent, consistent messaging from cover to cover.

The readability of many annual reports comes to crashing halt at the start of the MD&A, along with graphic design and plain language. The result is a bolted-together appearance that reflects a silo approach to business: communications or investor relations write the front of the book, finance writes the MD&A and the auditors prepare the financial statement and notes.

The annual report should, however, unite everyone in an effort to provide consistent messaging. Especially since trends suggest that the MD&A may just be where many readers begin reading. So get the CEO and other management involved early in the process to identify key messages and themes.

Add reader-friendly elements

In addition to plain language and graphic design to improve understanding and transparency, consider adding some of these reader-friendly elements to your next MD&A:

• a table of contents
• an executive summary
• clearly defined sections with active subheads
• vertical lists to break up long sections
• fully captioned graphs and charts to support the narrative
• a letter or brief report from the CFO

One last point: Review the notes to the financial statements for plain language. The wealth of information contained in the notes is quickly devalued by poor writing. Plus, the introduction of International Financial Reporting Standards (IFRS) in Canada this year will lead to even more notes. If you can’t shorten them, at least make them readable.

Making financial information clearer and more meaningful is an ongoing challenge. But as Buffett says about guarding Berkshire’s reputation: we can’t be perfect but we can try to be.

Buffett once explained that he writes to shareholders with his two sisters in mind. “Though highly intelligent, they are not experts in accounting or finance. My goal is simply to give them the information I would wish them to supply me if our positions were reversed. To succeed, I don’t need to be Shakespeare; I must, though, have a sincere desire to inform.”

Buffett succeeds in his 2010 letter, even though it runs to 25 pages and approximately 18,000 words. Here are a few samples.

On corporate reporting …

Charlie (Munger, Vice Chair) and I believe that those entrusted with handling the funds of others should establish performance goals at the onset of their stewardship. Lacking such standards, managements are tempted to shoot the arrow of performance and then paint the bull’s-eye around wherever it lands.

Yearly figures, it should be noted, are neither to be ignored nor viewed as all-important. The pace of the earth’s movement around the sun is not synchronized with the time required for either investment ideas or operating decisions to bear fruit.

On the benefits of owning Berkshire stock …

Charlie and I hope that the per-share earnings of our non-insurance businesses continue to increase at a decent rate. But the job gets tougher as the numbers get larger. We will need both good performance from our current businesses and more major acquisitions. We’re prepared. Our elephant gun has been reloaded, and my trigger finger is itchy.

On the calibre of Berkshire employees …

Some have MBAs; others never finished college. Some use budgets and are by-the-book types; others operate by the seat of their pants. Our team resembles a baseball squad composed of all-stars having vastly different batting styles. Changes in our line-up are seldom required.

Using quotes from (other) famous people to make a point …

Cultures self-propagate. Winston Churchill once said, “You shape your houses and then they shape you.” That wisdom applies to businesses as well. Bureaucratic procedures beget more bureaucracy, and imperial corporate palaces induce imperious behaviour. (As one wag put it, “You know you’re no longer CEO when you get in the back seat of your car and it doesn’t move.”)

Using plain language …

Our compensation programs, our annual meeting and even our annual reports are all designed with an eye to reinforcing the Berkshire culture, and making it one that will repel and expel managers of a different bent.

Fund consultants like to require style boxes such as “long-short,” “macro,” “international equities.” At Berkshire our only style box is “smart.”

At GEICO, for example, we enthusiastically spent $900 million last year on advertising to obtain policyholders who deliver us no immediate profits. If we could spend twice that amount productively, we would happily do so though short-term results would be further penalized.

Using storytelling wisely …

Starting with these seven magic words – Now let me tell you a story – Buffett explains how 60 years ago he first came to know insurance company GEICO after pounding on a door at headquarters on a Saturday.

Using a good turn of phrase ….

Such as this subheading in a section about his cautious approach to debt and holding cash:

Life and Debt – The fundamental principle of auto racing is that to finish first, you must first finish. That dictum is equally applicable to business and guides our every action at Berkshire.

Using humour effectively and often …

Last summer, Lou Simpson told me he wished to retire. Since Lou was a mere 74 – an age Charlie and I regard as appropriate only for trainees at Berkshire – his call was a surprise.

Our goal was to find a 2-year-old Secretariat, not a 10-year-old Seabiscuit. (Whoops – that may not be the smartest metaphor for an 80-year-old CEO to use.)

So you see, even though making money is serious business, you can still be a very effective communicator by using plain, simple language and not taking yourself too seriously.

You can read the entire letter here.