Dirk Lever, AltaCorp Capital Inc.
Bridge keeper: “What... is your quest?”
Sir Lancelot: “To seek the Holy Grail.”
From the film Monty Python and the Holy Grail
The Annual Ritual
Every year, companies set out on a quest to prepare their annual and various other reports for distribution to shareholders. For now, many still send hard copy by mail as a delivery method, but that is quickly shifting to electronic dissemination. And despite the shift to electronic distribution, few companies have realized cost savings. The investment is often significant, and regulatory requirements must be met, but how can the IR practitioner go a step beyond that without breaking the budget? One approach is to consider what the reader needs.
Two Simple Needs
Whatever the medium, today or tomorrow, and whatever the content (GAAP, IFRS, MD&A or even newfangled ‘sustainability’), I believe that when you boil it all down, most institutional investors (and retail is really no different) are looking for two key ingredients: a measure of past performance and guidance with respect to future performance.
Keeping it Simple
So how does a company provide that? One way is to try to keep things simple; bearing in mind the ingredients of past performance and future performance. But it’s also necessary to distinguish between items that can be considered ‘strategic’ in nature and those that are ‘tactical’ in nature. So what is the difference between strategy and tactics?
Strategy
Perhaps the easiest way to think about strategy is to take a look at your company’s long- term goals. This is typically where the long life capital assets are allocated. Some companies, like Apple Inc., have very explicit goals. Reading the Steve Jobs biography provides a clear understanding of Apple’s strategy – building leading edge consumer electronics and making a ‘dent’ in the universe. (I read the ‘dent’ as being pioneers and setting the direction of the entire industry.) Profitability followed.
From an internal corporate perspective, strategies – clearly stated and widely disseminated – help harness the human capital of a company. This helps everyone in the organization row in the same direction. If you are the IRO, remember that many employees will read the report, including your staff.
Does your company’s annual report clearly convey its strategy? Do you coherently explain how management is allocating capital (monetary, physical, human and intellectual) in order to achieve its long-term goals? Does management measure its progress? If there is a change in strategy, is this explained powerfully and precisely?
Frequently, companies with unclear strategies flounder. Shareholders want to see evidence that there is a clear strategy and that it is being followed. All forms of corporate capital should be working together toward a common goal.
Often the biggest corporate turnarounds occur because a company lost its focus, or had a flawed strategy, and a new manager refocused the business, harnessing all aspects of corporate capital.
Tactics
Think of tactics as the execution of many plans that move a company toward its strategic goals. Tactics involve taking advantage of opportunities that reflect the company’s strategy. Opening a new store is a tactical move. Implementing a new marketing plan is a tactical move. Buying a competitor is often a tactical plan. Tactics build to achieving the corporate strategy.
Both are Important But Strategy Trumps
It’s important to address both strategy and tactics but the corporate strategy is the ultimate yardstick to measure success. Too much discussion of tactics and not enough of strategy may make investors question whether a viable strategy exists. On the other hand, a weak discussion of tactics may make one wonder if the company has a realistic plan. It is a balancing act of sorts, but addressing both aspects of performance will help relay a company’s message regarding what it has achieved and where it is going.
Show Your Successes and Admit Your Failings
A company should interpret its performance for readers but understand that they look at the document with a critical eye and recognize not everyone can come first. Even the best companies can have a bad year. It is important to appreciate that if your company failed in some way, it is best to admit and explain this, including what is being done (or has been done) to rectify the problem. Warren Buffet admits his mistakes. Understand also that each portfolio manager tends to have his or her own blend of analysis and prognostication. So it will be very difficult to meet the needs of every shareholder or potential shareholder.
Does Your Reporting Show The Way?
Whether through quarterly or annual reports, marketing materials or website presentations, does your material help a reader assess the past and envision the future? Can the reader distinguish between your company’s tactics and its strategy? If so, you likely have saved investors time and effort and required far less copy to do so than you first thought was needed. If you achieve this, you may indeed have found the Holy Grail of Corporate Reporting.
Dirk Lever is Managing Director, Institutional Equity Research, AltaCorp Capital Inc.