This is one of my favorite times of year as an investor: CEO letters—the ones that appear at the front of companies’ annual reports—have begun to arrive in the mail. Most investors tend to flip right past the CEO’s letter on their way to the financial statements in the back, on the assumption (often true) most letters are boilerplate that have been churned out by the public relations department. Not me. I read every word. The CEO’s annual letter to shareholders is his one chance a year to step back and provide an explanation of the company’s long-term strategy, and give an honest assessment of how it’s executing against it. He can review the prior year, and tell shareholders what to expect in the upcoming one. For that matter, he can talk about anything he thinks it’s important for his shareholders to know. It can be very telling which CEOs take full advantage of this once-a-year opportunity and which just go through the motions. My rough sense is that the CEOs who write the most thoughtful letters tend also to be the most capable.
We’re only partly through CEO-letter season so far, but three that I’ve read stand out: the letters from Wells Fargo (WFC), M&T Bank Corp. (MTB), and Glacier Bancorp (GBCI). All three are terrific, for slightly different reasons. At Wells, for instance, John Stumpf does great job of recapping the company’s recent performance and tying it to its long-term strategy, which he lays out in detail. M&T’s Bob Wilmers provides a hard-headed review of the company’s results—but the highlight of the letter is the thoughtful, long-term analysis of the state of the banking industry he provides. It lays out pretty clearly how the industry ended up in the crisis it did in 2007. The letter should be required reading for anyone who’s interested in understanding the credit crunch and preventing another one. Finally, Glacier Bancorp.’s Mick Blodnick gives shareholders a candid assessment of how Glacier is doing as it works it way through the bottom of the credit cycle, and a candid assessment, too, of the long-term state of the banking industry. His tone is neither too optimistic nor too pessimistic just candidly forthright. You can tell he writes the letter himself.
Let’s take Blodnick’s letter first. Glacier, like most banks its size, took some lumps on the real estate side during the recession. OREO costs hit hard in 2011, and Blodnick makes plain that they will again in 2012. (The company even has a link to listings of its properties for sale on the home page of its web site.) But he also makes plain that Glacier isn’t looking for a quick fix. “There are no plans to package or bulk sale these distressed assets” Blodnick writes. “We are content to work through the remaining portfolio of non-performing assets in a methodical and disciplined fashion, and feel this course of action will generate the greatest amount of economic value long-term for our shareholders.” Sensible and straightforward—and almost certainly what’s best for long-term oriented shareholders.
Blodnick’s outlook for the industry is similarly clear-eyed, if not especially optimistic. “Historically low interest rates, anemic loan growth, and the loss of traditional fee income sources have made it very difficult to increase top line revenues” he says. “Until there is some relief in one or more of these areas, revenue growth will continue to be difficult to achieve.” That’s a message not many CEOs are eager to deliver to investors. Overall, shareholders reading the Glacier letter will come away understanding the challenges and opportunities the company faces and how it plans to address them.
As I say, M&T Bank’s Bob Wilmers’ reflection on the state of the banking industry is extremely insightful. He doesn’t start out upbeat though:
[I]t is difficult, for one who has spent more than a generation in the field, to recall a time when banking as a profession has been publicly held in such persistently low esteem. A 2011 Gallup survey found that only a quarter of the American public expressed confidence in the integrity of bankers. We have reached a point at which not only do public demonstrations specifically target the financial industry but when a leading national newspaper would opine that regulation which might lower bank profits would be “a boon to the broader economy.” What’s worse is that such a view is far from entirely illogical, . . .
The current situation is in stark contrast, Wilmers says, to how the banking industry was regarded when he entered the business. Back then, the leaders of the country’s biggest banks were seen as national leaders and their banks were well-regarded by the entire industry and the country as a whole. Wilmers then walks through the changes in the industry that have occurred between then and now, with stops at the Arab oil embargo, LDC lending, and the repeal of Glass-Steagall, to show how it arrived at its current sorry state. The banks were by no means the only culprits in bringing about the credit crunch, Wilmers says (he points his finger at everyone from the regulators to the rating agencies), but they played their part. Unfortunately for the banks, they were held in such low regard by policymakers that, when it came time to write Dodd-Frank, their input was viewed too self-interested and largely ignored. That’s too bad for the banks and too bad, Wilmers believes, for the country as a whole. Wilmers’ whole analysis really is excellent. It is definitely worth your time.
Finally, Wells Fargo. John Stumpf has done another outstanding job in his letter this year of putting the company’s 2011 results in long-term perspective, by tying them to the its long-term strategic priorities. Those priorities are:
- Putting customers first;
- Growing revenues;
- Reducing expenses;
- Living the bank’s vision and values; and
- Connecting with communities and stakeholders.
On the one hand, just about every company has a set highfalutin-sounding values, priorities, and whatnot. But Stumpf makes clear in his letter that Wells takes it’s seriously. “We never put the stagecoach before the horses,” he writes—which is one reason, he says, Wells took a full three years to integrate its acquisition of Wachovia. It wanted to get everything right for its customers. “In the Community Bank alone,” he goes on, “we touch people and businesses at least 5 billion times a year. Every single one of those interactions is vital to each customer. That gives us billions of chances a year to be a customer’s hero. . . . We will never be perfect. No company can be flawless billions of times a year. Smart companies, however, learn from their mistakes.”
Read Stumpf’s letter and it’s clear that Wells Fargo truly is customer-focused, as is evidenced by everything from is cross-sell strategy (“The opportunities . . . are immense. Even if we get to eight products per retail bank household, we still have room to grow. We believe the average American household has between 14 and 16 financial services products.”) to its philanthropic commitment (“Fortune ranked us 23rd among the 500 largest companies in America, and the Journal of Philanthropy ranked Wells Fargo No. 3 in corporate giving.”).
I wish all company CEOs wrote shareholder letters as thoughtful as these three. And it tells me something, frankly, about the CEOs who don’t. I find shareholder letters to be a very worthwhile input into my investment process. I urge other investors to spend more time reading them—and CEOs to spend more time preparing them. Of course, what might be the best letter of all, from JPMorgan Chase’s (JPM) Jamie Dimon, has yet to be released. I’m looking forward to reading it. In the meantime, if you see a CEO letter this season, e-mail me and let me know about it. The really goods are rare, but are a pleasure to read.
What do you think? Let me know!