Cultivating shareholder loyalty:the annual report

Where are individual shareholders when we need them?

Why storytelling counts more than ever

Implications of notice and access

Elements of a memorable annual, 10K wrap or HTML report

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5Embracing sustainability

5.ii IR guide Cultivating shareholder loyalty: the annual report

As anyone who owns a BlackBerry, laptop or cell phone knows, the opportu-nities for communicating 24/7 have exploded. Even

so, for public companies eager to tell their stories to investors, the range of communications media doesn’t always feel like particularly good news.

That’s because everyone – from financial consultants, Wall Street analysts and bankers to the financial media and bloggers – is vying for investors’ attention. In such a highly fragmented environment, it’s easy for investors to become overwhelmed and your message to get lost.

Many IROs realize the annual report remains a tremendous opportunity to cut through the noise. As the SEC and other regulators demand greater transparency, the annual report remains the only mandatory document in which companies have the latitude to editorialize and shape their message for their key audiences:

A changing landscape

loyalty counts

One catchphrase spawned by the internet age is ‘sticky eyeballs’, referring to users who spend a long time on a website and repeatedly return. Just as internet content providers want to cultivate sticky eyeballs, public companies should woo their equivalent: long-term investors.

For decades now, the investment world has understood the value of shareholders who aren’t scared off by short-term volatility and who take a long view in their investments. It’s these share-holders that bolster your stock price when the hedge funds short you or Wall Street analysts downgrade your stock.

Although internet penetration is high in the US, your shareholders may not fall within the tech-sav-viest of demographics. Companies with a high percentage of older investors know paper remains the preferred way of researching a company, as do companies with a large international base. Also, online annuals may be lost on overseas investors, which don’t always have access to sufficiently high-speed connections to read lengthy documents online.

shareholders, investors, employees, suppliers, analysts, buy-side portfolio managers and the media.

Notice and accessOn July 1, 2007 the SEC gave public companies a new alternative for delivering annual reports and proxy materials when it enacted its notice and access rules. Traditionally, companies have delivered annuals and proxy documents 25-30 days prior to the shareholder meeting. Under the new rules, public companies have the option to post proxy materials on a website after sending a notice of internet availability of proxy materials to shareholders at least 40 days prior to the annual meeting.

A stated goal of the SEC’s notice and access rule is to lower costs for public companies that send printed annual reports and proxies to shareholders. The extent of the cost saving remains to be seen, however. Companies are still obliged to mail a paper annual,

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Retail shares voted (%

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20%

40%

60%

80%

100%

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20%

40%

60%

80%

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90.17% 87.79% 34.29% 15.83%

Without notice and access

With notice and access

Without notice and access

With notice and access

Beneficial shares processed by Broadridge. Includes the broker vote. Averages are

calculated on the basis of each meeting.

As a percentage of total retail shares. Excludes e-delivery and broker votes.

IR guide 5.iiiCultivating shareholder loyalty: the annual report

free of charge, to anyone who requests a copy. What’s more, once a shareholder indicates a preference for paper, that preference must be honored until further notice is given.

In addition, Broadridge Financial Solutions, formerly ADP, holds a virtual monopoly over the proxy and annual report delivery business; its fees remain an expense companies simply can’t get around.

If cost saving is the goal, meaningful reductions are most likely to be achieved by large companies with diverse shareholder bases that previously printed astronomical numbers of annuals. Middle-market companies – with more modest distribution in the first place – will likely see far less dramatic savings, if any savings at all.

As of May 31, 2008, 634 corporate issuers out of an investment universe of more than 10,000 public companies had chosen notice and access, but many major companies with enormous shareholder bases have shied away from e-delivery. Apparently they have decided the potential savings on print and postage are outweighed by the opportunity cost of failing to commu-nicate with shareholders that desire a

compelling investment case in an eye-catching format.

Curran & Connors, an annual report designer, studied the behavior of the 100 largest public companies with fiscal years ending in December 2007. These were among the first to be given the option of using notice and access. Of the 100, 36 percent did traditional annual reports, 17 percent produced summary annuals, 41 percent chose 10K wraps and only 6 percent produced a 10K exclusively, eliminating any and all narrative. In other words, the vast majority of large public companies continued to write, design and publish annual reports.

Regulators have never required a large, glossy annual report per se, but the annual report has been, and still is, a necessary piece of investor communication. In 2005 Rivel Research Group found 64 percent of buy-side analysts and portfolio managers identified the annual report as one of the most helpful sources of information around. Notice and access hasn’t changed that. Today, most public companies produce an impressive annual report for the simple reason that it’s the right thing to do.

think votes

Nowadays investors are more empowered than ever to register their displeasure with management, so almost every public company is interested in bolstering shareholder support. If management fails to get a majority on a controversial shareholder proposal, it might find itself having to make some unwelcome changes.

Companies facing a controversial shareholder proposal or a difficult proxy fight should think twice before embracing e-delivery. There are signs that notice and access dampens voter turnout: analyzing results from the first year of operation, Broadridge found the retail vote from beneficial shareholders was 16.44 percent for companies once notice and access was used, compared with 34.3 percent the year before.

Even companies without a critical vote on the proxy should consider how to treat shareholders to garner necessary support when they need it. Companies that don’t build goodwill with shareholders today may find shareholders aren’t receptive when the com-pany finally needs their backing.

A cover can say it all

the slot machine imagery immediately grabs the reader’s attention; the tagline ‘building on growth and success’ sets the tone for the story WmS tells inside.

5.iv IR guide Cultivating shareholder loyalty: the annual report

During the 1980s and 1990s, annual reports functioned as grand tours: lengthy and sometimes tedious accountings of all the

assets and impressive aspects of a company. Those days are gone. First and foremost, today’s annual report tells a story, making a compelling case for why investors should choose to invest in one company over another.

For IROs who want to create an outstanding annual report, the central question is: what’s our strategy? In 2006 NIRI found that 86 percent of companies publishing a traditional annual report and 83 percent publishing a 10K wrap described communicating the company’s corporate strategy as their main objective.

Candidly answering a few questions is an excellent starting point. What do we hope to accomplish with the annual report? What things don’t investors know about us that they should know?

the big picture

Companies that interpreted the SEC’s new notice and access rules as a chance to simply provide a 10K and forego the traditional annual report weren’t necessarily tuning in to SEC chairman Christopher Cox’s full message.

In an October 12, 2007 speech at the Center for Plain Language symposium, Cox said: ‘The visual presentation of quantitative information is also enormously important in getting the compen-sation message across to investors clearly and understandably. By organizing data in tables, graphs and pictures, companies can help the reader to grasp more easily the key aspects of what might other-wise be just a jumble of numbers.’

Some companies are using notice and access to send print annuals to only their largest shareholders, but this leaves out significant shareholders with hundreds of thousands of dollars’ worth of shares. Many savvy IROs think these are the very shareholders they most want to reach: loyal investors with holdings large enough to make a difference.

Making your story sing

What questions do IROs repeatedly get asked? And are there any misconcep-tions we could potentially clear up by using this very public platform?

Savvy IROs know the annual report is far more than a regulatory obligation. It’s a chance to advance their standing with shareholders now and in the future. The best annual reports communicate value drivers, explaining where a company has been, what it’s doing today and where it hopes to be within the next three to five years.

Project management Establishing a rough timeline for the annual is one of the very first steps to take. All materials need to be complete and in the hands of shareholders 25–30 days before your annual meeting. If you’re using e-delivery, add an extra 15–20 days to the process so everything’s wrapped up at least 40 days before the meeting. Generally speaking, a good annual report takes

by placing its trademark hot dog atop each bar of its financial charts, nathan’s demonstrates its strong results in a lighthearted way in its annual report.

Charts can be fun

IR guide 5.vCultivating shareholder loyalty: the annual report

four months to produce, so count back five to five and a half months from the annual meeting date to calculate a kick-off date.

Next, select a project leader who will solicit feedback from many different individuals and assume ultimate responsibility for the final product. Some companies write the annual report internally; others hire a professional writer. Lining up this key individual early makes sense.

Finally, you should select a designer and printer well before the project gets underway. Increasingly, companies prefer to hire designers who can produce annuals for both print and online audiences. Your annual report team will work closely with a designer, so be sure to trust your gut and hire someone who will make a stressful time a little less angst-inducing.

Details countThe SEC requires that annual reports include a corporate profile, financial data and a management discussion and analysis (MD&A). Over the past five years, regulators have pushed public companies to move the MD&A

beyond mere legal boilerplate. A good MD&A is candid and honestly assesses the business environment, potential risks and rewards. Here are some other considerations:

Think brand. The annual report should be an extension of your corporate identity. Maintaining the same colors, themes and images throughout all publications will help strengthen your message.

Tell the bad with the good. ‘And now it’s confession time,’ writes Warren Buffett in his 2007 letter to Berkshire Hathaway shareholders. This remarkably candid sentence leads into a detailed discussion of the good acquisitions he almost flubbed and the poor ones he made.

Make the shareholder letter compelling. Your CEO may not be able to approximate Buffett’s folksy charm and plain-spoken wisdom, but his or her personality should come through.

Make it scannable. Few if any shareholders read the annual cover to cover. Make sure there’s plenty of white space, pull quotes and other reader-friendly details so investors can get the gist of your message by scanning the annual.

can you be too creative?

The most creative designs send a message or emphasize a particular point. Creativity for creativity’s sake alone can be a turn-off.

The best annual report designers know it’s important to be practi-cal. Creating a book that’s oversized might get your annual report noticed in the wrong way. Studies have shown institutional investors and retail shareholders like to store annual reports in filing cabinets. A document that won’t fit anywhere might get thrown away.

On the other hand, creativity that underscores your identity makes a strong impression. American Vanguard, an agricultural company, included a card embedded with seeds in its 2007 annual report. Shareholders were instructed to place the card in the earth and then watch a plant grow. This novel giveaway was perfectly attuned to the strategy and vision of the firm; it also gave shareholders a lasting reminder of American Vanguard’s message.

Making your story sing

capital city bank group updated the standard, stodgy director photos by showing the entire board without a single necktie in sight. the informal pose was consistent with the annual report’s emphasis on people: from clients to associates, shareholders and the community at large.

Let your personality shine

5.vi IR guide Cultivating shareholder loyalty: the annual report

Far too much time has been wasted arguing whether 10K wraps spell the demise of the traditional annual. Some of the best 10K wraps have

narrative and editorial sections that are every bit as hard-hitting, provocative and detailed as traditional annual reports. In fact, annual reports and 10K wraps are really the same animal. The only difference is how the company in question chooses to present its financial information.

Portfolio Recovery Associates is a case in point. In 2007 this Norfolk, Virginia-based portfolio management company chose to do a 10K wrap. Before reaching the 10K, however, the readers see 16 pages of glossy photos and narrative, including a shareholder letter, a colorful depiction of some financial results – such as total revenue and net income – and a detailed description of the business.

Another approach is to provide the 10K within a folder, giving it a longer shelf life as a corporate brochure or business summary. That’s what the Medicines Company did in 2007 – it, too, provided several pages of commentary up front.

Some companies that set out to save money by avoiding traditional annual reports are unpleasantly surprised by the printing and mailing costs for the 10K. Because the typical 10K has far more pages than most typeset financials, fulfillment can prove more expensive, not less.

What’s new online?Denny’s, the restaurant chain, has captured attention with its online annual, which has a remarkably consistent look and feel in print and on a computer screen.

For most companies, the online annual report hasn’t been a budget-buster. A few years ago, in fact, NIRI found that 86 percent of all online annuals cost under $20,000 to produce. Although a handful of companies have clearly innovated online, most are spending modestly.

But while the online annual hasn’t proven terribly expensive, its critics would say it’s not particularly effective, either. Too often, the printed annual is

XbRl approaches

XBRL, an interactive data-tagging system for financial information, could soon be mandatory for all public companies in the US. On May 14 the SEC approved a proposed rule that would require the 500 largest US-listed compa-nies to begin filing data in the XBRL format in early 2009 and all public companies to follow suit within three years.

Interactive data tags uniquely identify individual items in a firm’s financial statement, allowing the information to be easily searched for on the internet and downloaded into electronic spreadsheets.

Although the benefits of XBRL are impressive, companies have been slow to adopt the system on a purely voluntary basis. As encouragement, the SEC is giving public companies a 30-day grace period for initial filings so they can ‘tag’ data after the traditional reports are filed.

At its open meeting, the SEC noted that the average price for XBRL conversion in a pilot program was approximately $30,000 and that such conversions required roughly 40 hours of work.

Different formats abound

by placing the 10K within a folder, a company can use the outside photos and copy as a kind of corporate brochure.

Think flexibility

IR guide 5.viiCultivating shareholder loyalty: the annual report

designed and produced first and then converted into an online version. The problem is that this process doesn’t exploit the enormous possibilities of the internet. It would be far better to develop the print and online versions in tandem so that interactive capabili-ties could be considered from the very beginning. Whether you do a full-blown HTML version or a straightforward PDF, the internet version should be in your thoughts from day one.

Many experts believe online annuals have yet to come into their own. In 2008 London-based Radley Yeldar found 19 percent of companies in the FTSE 100 still provide their online report only in PDF. The number

of companies providing a full HTML version has increased to 46 percent from 32 percent, but even then the features are rarely cutting edge, Radley Yeldar found. In fact, just 11 percent of FTSE 100 firms include multimedia content such as video statements or audio files in their online annuals, while only 5 percent provide interactive charts or diagrams.

What investors really want online – as well as off-line – is to learn management’s vision for the future. Above all, it’s important to consider the online annual strategically. Make sure that whatever you want to communicate is as apparent online as it is on the page.

Walking the talk

Companies are looking for ways to talk about the environment and sustainability in language that doesn’t sound hopelessly fluffy. One way to do this is through the paper you select for your annual report.

The Forest Stewardship Council (FSC), an independent, non-profit organization, certifies sources of pulp or paper to say whether they’ve been produced in an environmentally responsible manner. Using FSC-certified paper in your annual report is one way to demonstrate that your actions match your words.

Some annual reports even say how many trees have been saved through using environmentally sound paper. Mohawk Fine Papers has estimated that if 100,000 copies of a typical 10K are printed on FSC-certified papers, the environmental benefits are the same as cutting down 170 fewer trees.

Safeway, Medtronic, Regency Centers and Pulte Homes are all firms that have printed their annual reports on FSC-certified paper.

Be creative

diversified energy company delek put its 10K on a flash drive that it distributed to investors and other interested parties along with its summary annual report. this attention-getting giveaway underscores the company’s forward-looking strategy.

Cultivating shareholder loyalty: the annual report

For more information

K Denis Connors

) +1 631 435 0400 Fax: +1 631 435 0422

@ dconnors@curran-connors.com

8 www.curran-connors.com

One way to make an impression with today’s shareholders is by demonstrating a commit-ment to the environment,

the community in which you operate and the global marketplace.

To achieve this, some major companies have published independent sustainability reports; others are dedicating pages in their regular annual reports to discussing climate change, international labor practices and other topical issues.

Annual reports that place an emphasis on the greener or more socially responsible side of corporate life are generally well received.

‘Count me in – the readers’ take on sustainability reporting’, a May 2008 report by the Global Reporting Initiative (GRI), found that 90 percent of readers of sustainability reports say their opinion of a company changed because of the report. Of those whose perceptions changed, 85 percent say they had a more positive perception after reading a company’s sustainability report.

GRI found that readers appreciate a balanced story. ‘Openness in disclosing economic, environmental and social impacts can give companies a competitive edge, but people aren’t fools,’ says Ernst Ligteringen, GRI’s chief executive. ‘They read these reports with a purpose and they want the truth, particularly the whole truth – not just selective reporting where their performance is good.’

The bottom line? Whenever possible, try to make the sustainability conversation as concrete as possible. Investors are wary of platitudes and eager to see real initiatives.

FEMSA, the Mexico-based beverage giant, devoted six pages of its 112-page 2007 annual report to sustainable development. Through photos and narrative, FEMSA discussed its environmental stewardship and the fact that 10.8 mn individuals benefit from its quality of life and community development programs.

Sustainability represents another facet of storytelling. Companies can – and should – use their annual reports to present a well-rounded picture of who they are. The annual report can be an ideal platform for putting a stake in the ground and explaining your strategy to the world. For many public companies, the annual report remains the best opportunity out there for telling a nuanced story that shareholders will find meaningful, relevant and perhaps even inspiring.

Sponsor’s statement

Curran & Connors is an award-winning graphic design firm specializing in the design and production of annual reports, corporate literature and interactive media. Our four state-of-the-art electronic studios and 16 regional offices allow us to serve our clientele in the US and beyond in all their shareholder communication needs. With over 40 years’ experi-ence, we serve clients ranging in size from developmental-stage organizations to the Fortune 500. Call us or visit our website and find out why we are chosen to produce more annual reports than any other design firm in the US.

Embracing sustainability

5.viii IR guide

Offices: Atlanta, GA; Boston, MA; Brentwood, CA; Charlotte, NC; Chicago, IL; Cleveland, OH; Dallas, TX; Denver, CO; Ft Lauderdale, FL; Hauppauge, NY; Houston, TX; Los Angeles, CA; New York, NY; Princeton, NJ; San Francisco, CA; Washington, DC