Publicly traded companies and other businesses with investors concerned about the performance of the company are required to make an annual report available to their shareholders. Companies often spend a great deal of time on the aesthetic appearance of their reports and use fancy colors, graphs and papers for a professional look. However, more important than the appearance is the information contained within the document. In certain cases, it may be the only formal correspondence from a company an investor receives all year.
Letter to Shareholders
The annual report almost always begins with a letter from executive management to shareholders of the organization. The style of the letter may vary depending on the current economic atmosphere and company situation, but its purpose is to recap the past year and provide a brief preview of the coming year. Typically written by the president, chief executive officer or chairman, the letter is meant to address some of the critical challenges facing the company, as well as highlight the business’s successes.
Annual reports typically contain financial statements in the form of tables illustrating the company’s financial health. At the very least, expect to see an income statement, balance sheet and statement of cash flows. Companies may prefer to include other financial charts that provide greater insight into the general operations of the company. For instance, a conglomerate may provide results from each of its individual businesses, while a bank may provide a breakdown of its loans by type and performance.
The management discussion and analysis — or MD&A — provides detailed commentary on the financial and operational performance of the business. The tone of this segment of the report is often less cordial and conversational than the letter to the shareholders. The bulk of the MD&A must be written in a way that pleases attorneys and regulatory agencies, so it's usually devoid of sentimental embellishments and descriptions. The MD&A explains things such as why sales were up or down for the year, what operational changes were made to improve costs and the financial impact, key transactions with other businesses, and other items that are relevant to the company’s financial performance.
Nearly all companies that produce an annual report to shareholders are required to be audited by an independent accounting firm. Even if this isn't required, companies often perform an annual audit for transparency to shareholders and other stakeholders. Companies usually like to include the report of the auditor certifying the financial results. The inclusion of these certifications by both the auditors and the company’s management became monumentally more important following the passage of the Sarbanes-Oxley Act of 2002. This act was passed in response to several of the major corporate accounting scandals that impacted investors, including the well-publicized collapse of Enron, and required executives to certify that they had reviewed the financial statements and auditors to attest to their independent auditor status.
Proxy & Voting Information
The annual meeting is the primary venue in which to present and approve new items governing the business. Nearly all companies require shareholder approval to do things such as issue more stock, accept a buyout offer or implement a new executive compensation plan. If there are matters to be voted on or proposals submitted by shareholders for consideration, they're often found in the annual report. The voting instructions may also be included, as well as a recommendation from the company’s board of directors.
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