For the thousands of shareholders who can’t travel to Omaha, the centerpiece of Berkshire’s investor relations is the annual shareholder report, distinguished for the absence of photos, themes and gloss, and also for the chairman’s letter. This letter, weighing in at almost 11,000 words, is about 10 times longer than the average letter in our annual shareholder letter survey of Fortune 500 companies. It’s different from all other shareholder letters not only because the CEO makes fun of himself; but lacking quarterly earnings teleconferences, one-on-one investor meetings and luncheons, it is the principal communication vehicle for investors to gain intelligence about where the company is and where it is going. It’s length underscores it’s singular importance.

    Buffett educates readers about the underlying principles of the business and offers information about current events so readers can conduct their own analysis of the enterprise value. To determine what’s important to include in the letter, he asks, ‘What would I need to know if I were an investor?’ He uses stories to make his points and builds credibility by disclosing what didn’t work out according to plan.

    It’s no secret that other shareholder letters are not as long, nor are they as well followed. Most journalists with whom we’ve spoken over the past three years, and a lot of institutional investors state flat out they don’t bother reading them. Declared to be either fluff or half-truths, these annual epistles just aren’t taken seriously. Only recently did Robin Blumenthal, who writes a weekly Barron’s column, say, "I don’t usually pay attention to those letters, but you’re telling me something different is going on. I want to know what it is." Her spin on our approach appeared in the March 22 issue.

    What’s the difference we observe? While our yearly research of the letters of 100 top-rated companies supports the prevailing attitude that most shareholder letters are deficient in content and delivery, our findings also show that some companies are writing letters distinguished by efforts to educate and engage readers. In 1997, this honor roll of companies included Continental Airlines, Charles Schwab, KNEnergy, IBM, GE, First Union, Xerox and Coca-Cola. Shifting from writing in a narrow or generic voice, these companies are noted for writing that is comprehensive, detailed and dynamic.

    Recognizing Wall Street’s increasing focus on leadership as a factor in equity valuation, we developed the LanguageWorks model to systematically analyze and rank leadership language in chief executive letters. It is a tool companies use to review both their annual letter process and content. This approach identifies and contrasts straightforward language such as goals, cash flow, results, awards and business opportunities. It also looks for evidence of more subjective information such as innovative actions or policies, analysis of the business environment, attitudes about employees, the needs of customers and expressing emotions.

    In our methodology, we assign values to each of the over 70 topics in the model. Letters are scored on the basis of aggregating the total values related to the topics addressed in the letter. Letters with the most content achieve the highest descriptive scores. When language has multiple meaning, it will score in a variety of categories, thus boosting scores and demonstrating the writer’s skill in simply communicating business complexity. We call this "holographic language." One of our favorite examples in 1997 is from the Williams Company letter: "When a company provides a total shareholder return of 729 percent in a seven-year time frame, a prudent stockholder may ask: ‘When is this train going to slow down or stop?’" In this one question, the writer offers a result and an image, raises uncertainty, interprets the needs of investors, and engages in dialogue.

    We score shareholder letters for efficiency by dividing the total descriptive score by the number of words in the letter. Letters in 1997 which scored high in efficiency by offering detailed information using the fewest words included MBNA, Southwest Airlines, Xerox and Proctor and Gamble. We normalize and combine both these scores to produce a measure of clarity that we call total impact. Letters which scored high in total impact were those mentioned at the beginning of this article.

    The model serves as a checklist for many companies because omissions from a letter can be as meaningful to readers as what is included. In 1997, we were surprised to find that among the ten industry groups which we survey, the banking and diversified financial services group was the only one to omit the word ‘cash’ or to fail to mention cash flow in their shareholder letters. Internet companies in our sample scored at the bottom on language indicators of action and performance.

Throughout the 1998 season of annual report production, we helped companies redefine their shareholder letter goals and content. Along the way, we gained first hand knowledge of how the process to produce the letter impedes rather than facilitates a satisfying outcome. In the past two months, we’ve canvassed over 50 companies to better understand this corporate frustration with the letter process. Here are some of our findings:

1. In most companies, the investor relations people are secondarily or not at all involved in the shareholder letter process.

2. Among the intended audiences of the shareholder letter, respondents consider institutional shareholders and portfolio mangers as most important, then cite retail shareholders; sell side analysts; and finally, employees. Customers are recognized, but aren’t considered to be as important an audience as the groups described above.

3. The production process varies widely among companies. The number of internal people who review the letter ranges from as few as four to as many as 120. About half the respondents estimate that between one and 10 internal people review successive drafts of the letter. Two-thirds of the respondents report that between one to ten drafts are produced in order to achieve a finished product.

4. Accountants are the most likely outsiders to review the shareholder letter. Boards of directors are considered to be the least helpful group of outside advisors.

5. Most respondents believe the letter should be about 1,000 - 2,000 words, but few respondents have any solid basis on which to support this belief.

6. Half the respondents say they are satisfied with the published version of the letter, but practically all respondents are dissatisfied or only somewhat satisfied with the process to produce the letter.

7. Letters that score highest in our model typically have an active and engaged CEO behind the process. Asked what respondents would want to change about their process, most respondents recommended more CEO input and guidance.

8. Most respondents place their company’s view of the relative importance of the shareholder letter as falling between serving as "the foundation for all corporate communication" and of "moderate importance." When asked to record their personal view, the scale moved closer to serving as the foundation for all corporate communication.

9. Given this belief in the letter’s importance, it is surprising that only about a quarter of the respondents have any kind of process to survey reader reaction and response to the letter and annual report. But respondents favor feedback.

    In the end, everyone in our survey agrees that the purpose of the shareholder letter is more than merely satisfying a reporting requirement. But because most companies deploy different means and media to get out their messages, most shareholder letters are not considered to be a centerpiece of corporate communication and strategy; they do not have to carry the weight of a Berkshire shareholder letter.

    It’s trendy these days to speak of the process of centering one’s attention and energy as a way to maximize power, influence and well-being. In this light, Warren Buffett’s letter may be seen more as a trendsetter than an anomaly. Eastern disciplines like Tai Chi show how centering our energy can deflect our opponent’s hostile energy and turn it back on them; an idea appealing for both its efficiency and effect. What and how we say things can make a huge difference, particularly when supported by our actions. When the shareholder letter serves as the centerpiece of both company communication and strategy, it will help to center corporate energies and realize corporate intentions.