Year-end reporting has always been a critical time for companies to step back and assess their achievements and shortfalls, evaluate how those results compared to the prior year and set the stage for the future. Since every crisis ends with lessons learned, innovation and reinvention, proactive companies will capitalize on this unique opportunity to step-up their year-end communications.
For many, this will mean setting a new bar for their year-end reporting best practices: new depth to earnings reports, shareholder letters, and proxy statements. These documents should consider all stakeholders who want to know more about what you experienced in 2020—the strengths and the weaknesses—and what lessons you will apply to your 2021 playbook. (See, “10 questions for crafting your 2020 year-end messaging strategy,” at the end of this article.)
Both COVID-19 and the social injustice issues of 2020 have put a bright light on the importance of strong Environmental, Social, and Governance (ESG) practices, including diversity and inclusion (D&I) and human capital management (HCM). The guiding principle this year is “actions speak louder than words” communication to all stakeholders. While more disclosure on D&I in year-end communications is expected, investors are also looking for actionable and measurable initiatives.
The following are some recommendations for year-end 2020 communications.
Broaden the range of topics in your shareholder letter.
Annual report practices continued to evolve in 2020. Many large-cap leaders shifted from producing a traditional stand-alone annual report to an integrated format that combines the annual report with sustainability reports. For an outstanding example of this approach, see how Jacobs Engineering told the story of its COVID journey while providing a fact-based narrative around the firm’s progress with ESG and D&I.
For a better 2020 shareholder letter, consider:
- A timely, thoughtful theme
- A well-written and compelling CEO letter that speaks to all stakeholders, not just shareholders
- Commentary on ESG policies
- Compelling visuals, including infographics and call-out texts to make the document easy to read and memorable
Beyond publicizing your annual report through a press release, expand its reach by adding a related message from the CEO or chairman to your website, posting report content on social media, and adding a short, well-produced video clip to your investor relations page.
Evolve the proxy to reflect best practices.
For many years now, we recommended that companies leverage the valuable real estate in their proxy statements. Proxy practices have evolved along with the shift to passive investing and the proliferation of ESG funds. Increasingly, companies elect to prepare more substantive proxy cover letters that incorporate their IR stories. That provides proxy readers the context they need to evaluate performance and executive compensation without searching for other disclosures.
This is especially important for companies whose 2020 results were negatively impacted by COVID-19. The goal here is to make it easier for busy proxy readers to get a holistic view of the company and quickly become better informed as responsible proxy voters. In the current proxy season, companies are also leveraging their proxies to provide more details on their HCM and D&I policies.
Across the board, we are seeing companies organizing cross-functional teams that incorporate IR professionals and design resources to write compelling proxy letters. The letters are written in plain English with straightforward site navigation and professional layout and design elements to engage the reader better and humanize their board and management team.
For a treasure trove of proxy best practices, see Donnelley Financial Solutions’ (DFIN) “Guide to Effective Proxies.”
Build-in an ESG narrative.
ESG communications will matter more this year. As BlackRock’s Larry Fink discussed in his 2021 letter to CEOs, “Assessing sustainability risks requires that investors have access to consistent, high-quality, and material public information.”
Respondents to a recent BlackRock survey of institutional investors said they plan to double their sustainable assets under management (AUM) in the next five years—from 18% of AUM today to 37% by 2025. From January through November 2020, investors in mutual funds and exchange-traded funds directed $288 billion globally into sustainable assets, a 96% increase from the entire previous year. Small- and mid-cap companies just embarking on their own ESG communications process can learn a lot from their large-cap colleagues who have had well-established ESG programs in place for years.
We have encountered some management teams who do not believe they have an ESG story. Others think there’s no reason to dedicate time and resources to ESG. They reason that their only threat comes from large passive investors who could potentially vote proxy against them. As a counterpoint to that view, we see several compelling reasons that robust ESG communications offer a competitive advantage to firms looking to expand their value proposition to all stakeholders.
- ESG fund flows more than doubled in October from flows in April. According to Morningstar, ESG fund flows climbed to $36 billion through October 2020, and institutional investors said they plan to double their ESG investments over the next five years.
- Meanwhile, a growing list of stakeholders has shown they care about ESG. These include employees, especially millennials and younger generations, who are in the workforce in great numbers. Many customers and prospects have indicated that they prefer to do business with ESG-friendly companies too. Increasingly, many M&A partners, who are driven by the transaction math of “1+1 = 3,” are focused on ESG policies.
- With the proliferation of new ESG ratings, active investors are also asking companies for more information about ESG, and sell-side analysts have taken to publishing reports ranking companies by their ESG scores.
- Finally, activism is also expected to re-accelerate in 2021, and there’s a trend for using ESG inadequacies to open the door to an activist campaign. According to Amy Lissauer, global head of activism and raid defense advisory, Bank of America, “We’re going to see the emphasis on environmental and social more than we’ve ever seen.” She adds that activism has long been focused on the “governance component of ESG investing. What we might see in 2021 that is different is that ESG-focused proposals will get a lot more support.”
Companies that have not begun the ESG journey should begin now—starting with how they took care of their stakeholders while managing through COVID. A great way to get the ESG ball rolling is to review the frameworks developed by Sustainability, Accountability Standards Board or the Task Force on Climate-Related Financial Disclosures and tell the ESG story you already have.
Address new human capital management disclosures.
Starting with the 2020 10-K, the SEC requires public companies to report on human capital in SEC filings. The minimum requirement calls for companies to report the number of people they employ and to provide a description of the human capital resources and measurement objectives they use to manage their business.
Many companies will be grappling with what’s material to their business and how much to disclose. Obviously, a strong workforce is material to the sustainability of any company. Start with addressing what your company has already done to attract, retain and train people.
Many of the 10-K HCM disclosures we have seen so far are more qualitative than quantitative. We believe that makes sense, especially for companies without a set of fully vetted metrics. Since the 10-K is not usually the first place investors find information on a company, we recommend including HCM messages in other essential communications materials, especially the proxy.
COVID taught us many lessons. One of the most important is untapped equity in the narrative surrounding your company’s journey through its pandemic year. Successfully managing through a crisis of this magnitude and complexity offers your firm a unique opportunity to build trust, credibility, and corporate reputation through an increased emphasis on effective stakeholder communications.
While the pandemic created leaders and laggards in every industry and sector, investors will ultimately measure how well companies demonstrated their resilience and adaptability in shaping strategies to surmount 2020’s extraordinary hurdles.
10 questions for crafting your 2020 year-end messaging strategy
- How did you manage through COVID in 2020?
- What lessons did you learn that will make you a stronger company in 2021?
- What achievements are you most proud of?
- How did you balance the needs of all stakeholders during the pandemic?
- What steps did you take to advance your ESG story in 2020—to make your workplace more diverse and inclusive and pay forward your HCM initiatives?
- What challenges remain, and what is your plan and timeframe for addressing them?
- What is your take on the pace of recovery in general and for your industry and business?
- What is your growth plan for 2021 and beyond, including organic growth and M&A prospects?
- Did your organization become more efficient and profitable as you adjusted your business model in 2020? Is this sustainable?
- How will a new administration in Washington affect your business?
Moira Conlon is the founder and president of Financial Profiles.