14 April 202027 minute read

Annual shareholder letter considerations and guidance

Corporate Governance Alert

Given the significant impacts on many businesses caused by the coronavirus disease 2019 (COVID-19) outbreak, leadership in many public companies are considering whether and how to address the recent outbreak or market dislocation in their annual shareholder letters. 

This alert provides an update on practice as of the date of publication as well as general guidance and insights to assist boards of directors and senior management of US public companies as they evaluate their communication strategies.

Use of shareholder letters

The shareholder letter is an opportunity for leadership to share its vision and to provide its perspective on the company’s performance and condition and its progress toward long-term goals.  Shareholder letters are not required under SEC rules, but many companies include a letter or letters from the CEO, Chairman and/or Lead Independent Director with their annual reports or at the beginning of their annual proxy statements.[1]  A 2018 study of the Dow 30 found that 80 percent of the Dow 30 companies included at least one letter with their annual reports.  

Shareholder letters typically range between 3-10 pages and contain some or all of the following elements:

  • An introduction that sets the tone and characterizes the past year;
  • A summary of financial benchmarks and other business KPIs such as revenue, earnings and important balance sheet items;
  • A discussion of important achievements in the past year, including in non-financial areas such as climate change, diversity, inclusion and belonging and other corporate social responsibility initiatives;
  • A discussion of any uniquely material challenges or risks the company and leadership’s plan to address them; and
  • A discussion of outlook for the current year and longer-term goals.

Tips for effective shareholder letters

1.  Vision. The shareholder letter is an opportunity for leadership to remind shareholders of the company’s identity and values as well as leadership’s vision for the company’s future.  This discussion enables leadership to share a sense of the company’s values, culture, accomplishments and challenges and to provide context for the company’s past performance and future expectations. 

 

2.  Balanced.  While the SEC has not provided specific guidance on shareholder letters, companies may consider SEC guidance on similar principles-based disclosures, such as in Management’s Discussion and Analysis (MD&A).  This guidance provides that companies should present “a balanced view of the underlying dynamics of the business, including not only a description of a company’s successes, but also of instances when it failed to realize goals, if material.”[2]  While shareholder letters often tilt heavily toward the positive, leadership is encouraged to seek some balance between touting the successes and accomplishments of the company and a recognition of its challenges and risks.  In particular, the use of excessively promotional language can obfuscate or overly deemphasize important information and present the company in a false or misleading light.  Additionally, the candor associated with acknowledging internal and external headwinds and tailwinds to the business can develop trust among leadership and market participants.

 

3.  Context.  The shareholder letter enables leadership to provide more personalized context and perspective for the company’s performance and results and in a manner that helps market participants develop a deeper understanding of leadership’s vision. 

What companies are saying about the COVID-19 outbreak

In light of the current market turmoil and uncertain macroeconomic environment, we have been monitoring disclosures by public companies regarding the COVID-19 outbreak and/or the uncertain environment more generally.  As part of this project, to date we have reviewed 112 recent shareholder letters published by Fortune 500 companies.

Companies have taken a variety of approaches on these matters in their letters. Of the 112 shareholder letters that we reviewed:

  • 52 percent of all shareholder letters are silent about COVID-19 and its potential impact on the company.
  • 28 percent of all shareholder letters are silent about COVID-19 but do include a reference to the company’s intent to conduct, or to potentially conduct, a virtual meeting due to COVID-19 concerns.[3]
  • 19 percent of all shareholder letters include statements regarding the risks posed by the current situation, even as the impacts on the company may as yet be unknown.  Of these shareholder letters, four centered COVID-19 as a dominant theme of the letter and one included a separate CEO letter specifically addressing COVID-19. 
  • 1 percent of all shareholder letters include a non-descript reference to the COVID-19 situation without specific information, for example, by referencing “the turbulent geographical environment we are experiencing” or stating that the company and all others are facing “a new challenge: a health scare and the resulting market panic.”

Warren Buffet’s widely read letter to Berkshire Hathaway shareholders, which was published on February 22 when the outbreak was largely contained to China, was silent on COVID-19.  However, on March 18, he published a follow-up letter in which he noted that “events have moved very fast since Berkshire issued its annual report” and it is with “much regret” that the company plans to stream the shareholder meeting online and limit attendance at the meeting to Mr. Buffet and a small group of Berkshire employees. 

Why do only 1 out of 5 of these annual shareholder letters mention COVID-19?  Given the uncertainty of the scope, extent and duration of the pandemic and the difficulty in anticipating its full impact on business in the short and medium terms with the situation and outlook changing day by day, and even more so in the long-term in a post-pandemic world, leadership may be reticent to endorse a particular view other than to say that they are monitoring the situation carefully and to indicate a need for a virtual shareholder meeting.  Others may be hesitant to deviate from views taken or that may be taken in the future by a particular government, agency or other organization such as the World Health Organization.  These hesitancies may stem from concerns that direct discourse could be perceived as a political statement or a statement that is insensitive to those afflicted by the disease or otherwise impacted. 

Again, while not directly applicable, SEC guidance on MD&A disclosure can provide helpful structure for leadership to consider these questions as it seeks to provide important information and perspective to shareholders and other stakeholders.  In particular, leadership may focus on the known material events and uncertainties in the business and the underlying reasons or implications, interrelationships and relative significance.    

Below are 10 recent examples of relevant shareholder letter disclosure: 

Company

Excerpts from shareholder letter

The New York Times Co. (NYSE: NYT) shareholder letter dated March 13, 2020

The central mission of The New York Times . . . is especially important at times of crisis – like the coronavirus pandemic, which is unfolding across America and the globe.

 

The coronavirus clearly also poses challenges for The New York Times as a company. We plan to maintain operations and continue to deliver first-class services to our millions of loyal readers in the United States and around the world — even if that means significant adaptations to many of our routine working practices. There is no doubt that, in common with many other media companies, we face headwinds in advertising revenue. Unlike most of our competitors, however, we are a subscription-first news provider with a much smaller — and diminishing — exposure to the vagaries of the advertising market. Therefore, although we may feel some transient impact, we do not expect the virus to significantly affect the successful rollout of our digital growth strategy.

 

Penske Automotive Group, Inc. (NYSE: PAG) shareholder letter dated March 19, 2020

At the date of this letter, the Coronavirus continues to impact our daily business. Our focus is to ensure we meet customer needs while doing our part to keep our customers, employees and our communities safe. We have enhanced our cleaning procedures, both for facilities and vehicles, and instructed employees who feel ill to stay home, among other measures.

Six Flags Entertainment Corporation (NYSE: SIX) shareholder letter dated March 19, 2020

Even as the world grapples with the implications of the coronavirus (COVID-19) pandemic, we are enthusiastic to lead Six Flags toward a new phase of long-term growth… Due to the coronavirus (COVID-19) pandemic we temporarily closed our parks beginning in mid-March. This has caused us to delay these investments and scale back spending of expenses and capital until business operations begin to normalize. Rest assured, however, that we are positioning ourselves so that we are ready to aggressively resume our business transformation plans as soon as prudently possible.

Ecolab Inc. (NYSE: ECL) shareholder letter dated March 20, 2020

As I write this letter, the COVID-19 pandemic is expanding around the world. I am proud of the way our team has stepped up to help control the spread of this virus. As circumstances continue to evolve, I am confident in our ability to help our customers and our communities successfully manage through the coronavirus pandemic. Coronavirus is today’s issue, and we know there will be new problems to solve in the future. The world will continue to change and so will we – finding better ways to do our work, developing new capabilities and helping our customers thrive through what is sure to be a dynamic decade.

Goldman Sachs Group, Inc. (NYSE: GS) CEO and Lead Director shareholder letters dated March 20, 2020

CEO Letter: As we issue this Proxy Statement, the world is facing a global health crisis and volatile market environment with significant unknowns related to COVID-19. It is a fluid and historic situation, and we are taking actions to support our people, their families and our clients. We have enacted business continuity plans so that we can continue to serve our clients while protecting the well-being of our people. Helping clients navigate dynamic environments is core to what we do, and we will stand by and assist them always.

Lead Director Letter: We are cognizant of the challenges and uncertainty posed by the spread of coronavirus, or COVID-19, for the firm, our people, our shareholders, our clients and other stakeholders, and our Board remains diligent and focused on its work.

 

HCA Healthcare Inc. (NYSE: HCA) shareholder letter dated March 20, 2020

As we write this letter, we want to thank our colleagues for their commitment, work and dedication to the communities we serve. As our country faces the challenges posed by the coronavirus (COVID-19), we are leveraging our resources to protect our nurses, physicians, and employees so they can care for our patients. Our focus, now as ever, is to diligently respond to the evolving needs of those we serve.

Leidos Holdings, Inc. (NYSE: LDOS) shareholder letter dated March 20, 2020

As I write this letter the news is dominated by the latest development associated with COVID-19. At Leidos we have taken significant steps to protect our people. We have established a working group and have mobilized our company to make Leidos a leader in proactively addressing the health and safety of our employees and the risk of further spread of the virus. In addition, Leidos is at the forefront of finding global solutions to deal with this disease. In concert with our various customers, Leidos is supporting efforts to model the potential spread of the virus, research the cause and effect of the transmission, and fast track a vaccine through the FDA process.

Alaska Air Group, Inc. (NYSE: ALK) shareholder letter dated March 27, 2020

While we typically use this forum to reflect on the past year, our world is changing very rapidly with the coronavirus pandemic and its economic fallout. As the situation evolves, we are reminded why the safety of our people and the communities we serve is our number one priority. Our hearts and prayers go out to all of those who have been personally affected by the virus, and to the many more who will be affected by the economic damage that has been and will be inflicted by it.

 

Our industry has been through other challenges in the past 20 years that have had a significant impact on the demand for air travel, including the September 11th attacks and the financial crisis of 2008 and 2009. It is sobering to share that, from what we know today, the impacts from this crisis are likely to be far more significant than those two events combined. However, I believe our industry is better prepared today than it was in any of the previous crisis periods to withstand the impact to air travel demand. Airlines are financially stronger, with generally better balance sheets and better liquidity.

 

For those readers who are new to Alaska Air Group, we are a large and successful company. However, we compete every day with airlines many times our size and do so successfully. Why? Because we have highly engaged employees who provide great service. That great service and our low fares lead to fantastic customer loyalty. And finally, we have a low-cost structure and solid balance sheet. As a smaller carrier, we’ve become skilled at adapting to change and adversity. For example, after September 11th, we found an opportunity and launched trans-con flying, and that flying now represents approximately 20% of our capacity (this excludes trans-con flying added in the Virgin America acquisition). And, after the recession of 2008 and 2009, we built our Hawaii and mid-con franchises, each of which now represent nearly 15% of our capacity. Time and time again, we have found a way to turn crisis into opportunity because of our resiliency and the commitment we have to our employees, our guests, our communities and you, our shareholders.

 

Andy Grove, the transformative leader and CEO of Intel, once said that bad companies are destroyed by crisis, good companies survive them, and great companies are improved by them. The months ahead will determine exactly what kind of business Alaska is. If this crisis is anything like the ones before it, and if the fight in our people is anything like what I believe it is, I think we will demonstrate that, by Andy’s definition, we are a great company.

 

It feels strange to shift the spotlight from current events to last year’s results, but we will provide a brief recap of 2019 as a reminder of the platform we have built, the accomplishments of our people, and the opportunity that awaits us once the crisis passes. ….

The impact of the coronavirus on our industry has been severe, and the path to recovery could be long. We’re doing everything we can to control the parts of our business that we can control. As I write this letter, our industry is also working with Congress and the Administration on legislation that would provide airlines with much needed financial assistance.

 

Air travel has been, and will continue to be, a critical service that connects people, families and businesses. And the competitive advantages which Alaska has are real and they are durable. I know I speak for our entire Board and leadership team in saying that, despite the extraordinary and unprecedented current circumstances, we remain confident in our people and we are ultimately optimistic about our future.

Illinois Tool Works Inc. (NYSE: ITW) shareholder letter dated March 27, 2020

As we write this letter, the world is in the throes of a global pandemic crisis, and measures being implemented by governments around the globe to bring it under control are increasing in their scope and intensity almost daily. We are in a time of unprecedented disruption and uncertainty, both from a human health and an economic perspective.

 

At ITW, 80/20 thinking and the laser-like focus that it drives on what is most important at any point in time have served the company extremely well in times of both opportunity and challenge for over 30 years. In this time of exceptional challenge, we have no doubt that our ability to utilize this unique ITW skill to come together as a company and focus on what is most important will see us through this global pandemic crisis and allow us to emerge well-positioned to resume our journey to ITW’s full-potential performance.

 

To that end, we have determined that for the duration of the global pandemic crisis, we will focus as a company and in every one of our divisions on the following two priorities:

1. The health, well-being, and support of our ITW colleagues, and

2. Continuing to serve our customers to the best of our ability.

These will be our “80” priorities until this crisis is over. In executing on these priorities over the course of the coming weeks and months, more than anything we will rely on ITW’s core values, our decentralized entrepreneurial culture, and our “flexibility within the framework” operating model to guide each of our divisions and their leadership teams in determining how best to implement them in their specific situations.

 

There is no question that the issues and uncertainties associated with the coronavirus pandemic will present some challenges for ITW and will have an impact on our near-term performance, as will be the case for just about every company. However, we believe strongly that all the work we have done over the last seven years to improve our company’s profitability, capital efficiency, and balance sheet put ITW in a stronger position than many to withstand the effects of the pandemic, however they unfold, and to come out the other side well-positioned to continue on our path to ITW’s full-potential performance.

Yum China Holdings, Inc. (NYSE: YUMC) shareholder letter titled “Managing the Impact of COVID-19” dated March 27, 2020

As I write this, the COVID-19 situation is still evolving. Our foremost concern is the health and safety of our customers, employees and business partners. We implemented controls following guidance from the relevant authorities to minimize the risk of infection at our stores. We also pioneered contactless delivery and pick up, as well as corporate catering services as safe and desirable alternatives for customers to enjoy our meals.

 

As discussed at the 2019 fourth quarter earnings release call, we closed a significant portion of our stores during the Chinese New Year holiday period. Since that time, more companies have restarted work and travel and quarantine restrictions are gradually being lifted in China, and we have been gradually reopening stores on a partial or fully operational basis. Concurrently, we have seen our delivery and takeaway sales gain traction as consumer awareness increases. However, we remain cautious as the situation continues to evolve.

 

As you can anticipate, the COVID-19 situation has impacted our results. Fortunately, we are a fortified and resilient company that is well positioned to weather this storm. The rapid response of the Yum Chi

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