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IR Communication Tools FAQ

Annual Reports

Q1
Q2
Q3
Q4
Q5
Q6
Q7
Q8
Q9

Shareholder Newsletters / Reports

Q10
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Q13
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Q15
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Q17

Q1

Why are annual reports necessary for Japanese companies?

A1

In recent years, the stock prices of Japanese companies have been greatly influenced by overseas investors. At the same time, the percentage of Japanese stocks held by overseas investors has grown to unprecedented levels. Accordingly, IR activities geared toward overseas investors have become important for all Japanese companies, not just those listed on overseas markets, in maintaining the fair values of their shares and strengthening their shareholder bases. Annual reports are among the most trusted of the various IR communication tools. This is because annual reports include financial statements that have been audited by the independent auditors, and therefore contain the resulting auditor’s report. They also contain a variety of qualitative information, such as that pertaining to the management strategies developed by the company’s senior management. It is for these reasons that annual reports are seen as the only IR tool that assists investors in comprehensively evaluating and analyzing a company’s corporate value.

Q2

What are the key elements of a superior annual report?

A2

For Japanese companies, annual reports are a document that lacks legal requirements on the information disclosed. Accordingly, the format and standards for disclosure are not subject to regulation. As a result, this allows Japanese companies to be creative when planning the content and visual presentation of the report, in turn enabling them to differentiate themselves from their competitors. However, what is important in producing an annual report is to consider the prevailing global standards and ensure that the level of information included, as well as the quality of the report, lives up to the expectations of investors. In particular, investors, who are the primary readers of annual reports, expect the annual report to paint a clear picture of management’s thoughts in such areas as the management vision, growth strategies, and capital management. A superior annual report, on the other hand, must include highly reliable financial information. At the same time, it must convey a strong message that communicates the intentions of a company’s senior management.

Q3

How should the target audience of an annual report be considered?

A3

Annual reports are generally created for the purpose of conducting IR activities. For this reason, the primary targets of these reports are shareholders and other investors. In saying this, however, there are several companies that use these reports as a form of PR, advertising their business activities or the company itself. In actuality, annual reports are used in a variety of ways throughout a company’s business activities. However, the information communicated through IR activities varies from those communicated through PR or marketing activities. In certain cases, these activities may communicate contradicting messages. While annual reports may be used for a variety of means, it is impossible to make a report that can meet the needs of every reader. In producing an annual report, it is necessary to consider the fact that the interests of the stakeholders reading the report vary. However, the goal of an annual report should always be meeting the information needs of shareholders and other investors, particularly institutional investors.

Q4

How can an annual report be made into a strategic communication tool to be used in a company’s IR activities?

A4

Annual reports should not been seen as a passive communication tool for merely reporting business results. If an annual report is simply seen as an English-language business report—only offering information such as overviews of performance, business operations, and financial indexes—then it is probably a waste of the company’s time and money. Instead, an annual report should be seen as an active communication tool. In order to make an annual report into such a tool, it is first necessary to gain a clear understanding of how the company is evaluated by capital markets and investors. Following this, the company must analyze these trends to develop IR scenarios that guide such evaluations in a positive direction over the medium to long term. The company should then clarify the roles of all of its IR activities and IR communication tools, including its annual report, and consider what messages should be communicated in different situations and by which tool.

Q5

What can be said about the recent rise in companies producing Japanese-language annual reports?

A5

Traditionally, annual reports in Japan have been thought of as an IR communication tool published in English for the benefit of overseas investors. However, in recent years, roughly half of the companies that publish annual reports have begun publishing Japanese-language annual reports in addition to English-language annual reports. One reason for this trend is the fact that annual reports are a very useful IR communication tool for Japanese institutional investors and securities analysts. This has resulted in a growing demand for Japanese-language annual reports. Another reason is the fact that distributing annual reports only to overseas investors contradicts a company’s efforts to practice fair disclosure. Going forward, the number of companies publishing Japanese-language annual reports is expected to continue increasing.

Q6

Are there trends for annual reports?

A6

The development of annual reports and the information contained within them changes with each coming year in response to fluctuations in the operating environment related to corporate management and IR activities. In particular, in recent years there has been a growing trend toward bolstering the amount of information on a company’s policies regarding such areas as corporate governance, corporate social responsibility (CSR), capital management, shareholder returns, and corporate value. Further, companies have been shifting away from focusing on only the disclosure and analysis of quantitative information, such as that related to the company’s business performance and financial condition. Instead, they have been increasingly turning their attention toward developing innovative new means of communicating the strengths of their intangible assets. These intangible assets, such as superior human resources and technologies or brand value, help a company compete in markets. In this way, annual reports differ greatly from securities reports and other forms of formulaic disclosure that primarily consist of written information and that has to follow legally regulated formats. Annual reports are able to use an attractive visual design to paint a clear picture of the company by appealing to one’s sense of vision—which is the greatest strength of an annual report.

Q7

What are the costs of producing an annual report and how much time is needed?

A7

The costs of outsourcing the production of an annual report (outsourcing costs) vary dependent on the range of services that are outsourced. There are cases in which companies only outsource the English-language translation, design, and layout aspects of production, and those in which planning, research, and drafting are also outsourced. Costs also vary based on such factors as the number of pages and the number of reports printed, as well as the need for photography sessions. Generally, the production process takes approximately 6 months from the initial planning phase to the delivery of the final printed product. For example, the production process for a company that settles its accounts on March 31 would generally have planning conducted in January or February, research conducted in March or April, drafts constructed in May, the design and layout completed in June, and the delivery of the final product in July.

Q8

How should an annual report be positioned in an IR program?

A8

The position of the annual report in an IR program should be as the most important of the communication tools that form the core of the program. This is because of the inherent value of annual reports that stems from the audited financial statements included within them and the clear picture they paint of such factors as the company’s management policies and growth strategies. Annual reports should also be used to illustrate the company’s strengths and growth scenarios from a long-term perspective, something not necessarily accomplished by quarterly financial statements and the IR activities that accompany them. The production of an annual report requires the departments responsible for its production to work together with the senior management of the company. The time and effort expended on this process helps develop a consensus throughout the company regarding the direction of its IR activities. This in turn leads to the improvement of the company’s IR program as a whole.

Q9

What are some key points for effectively utilizing an annual report?

A9

Annual reports should be used as an active communication tool for raising awareness of the company and its business activities. This can be done by utilizing commercial mailing lists to send annual reports directly to potential investors, such as institutional investors dealing in Japanese stock, as well as to shareholders and other investors that are aware of the company. Annual reports can also be used to facilitate discussions during visits by overseas investors and during overseas IR presentations. By sending the company’s annual report to such investors before meeting with them, the company is able to engage in more-efficient discussions as the investors will already have a basic understanding of the company. Of course, it goes without saying that in order for these methods to be effective, a company must first produce an annual report that is rich in content.

Q10

How are listed companies utilizing shareholder newsletters and reports?

A10

In Japan, shareholder newsletters and reports are seen as the definitive IR tool for engaging in communication with shareholders, and accordingly the majority of listed companies publish them. These documents are usually sent to all shareholders following shareholder meetings, and are an important tool for communicating the details of the company’s financial condition and dividends in the fiscal year, as well as the status of management. However, the traditional “report” format of these publications tends to be overly formulaic and suffers from a lack of useful information, and therefore they cannot be considered useful IR communication tools for a company’s shareholders. Recently though, several companies have begun radically overhauling these documents, revising such areas as the timing of their publication, their content, and their design. The end result is a business report in the form of a “shareholder newsletter” that is easier for shareholders to read and that features a wealth of valuable information. Also, it has become increasingly more common for companies to use these documents as a tool to acquire new shareholders, as well as to inform existing ones.

Q11

What is the role of shareholder newsletters and reports in an IR program?

A11

Business has entered into an era characterized by companies engaging in aggressive M&A activities. In this environment, listed companies are faced with the ever-more-important management issues of maintaining the fair value of their stock and acquiring long-term investors. Following the recent breakdown of the cross-holding system common in Japan, it has become more important than ever before for Japanese companies to earn the unconditional trust of their shareholders through active communication. It is essential for a company to communicate with its shareholders on a regular basis, and facilitate a deep understanding of such areas of the company’s business as its management policies and business strategies. This is believed to be a key factor in ensuring the long-term investment of shareholders and maintaining the fair value of the company’s stock. For this reason, it can be said that shareholder newsletters and reports are more important now than ever before for their ability to facilitate regular communication with shareholders.

Q12

Why are printed shareholder newsletters and reports important in the age of the Internet?

A12

The Internet has become a part of people’s everyday lives, and subsequently has become an intrinsic part of corporate IR activities. A number of listed companies have created websites for private investors, enabling information to be provided to investors in real time, thus making accessing information even more convenient for investors. However, websites are passive IR communication tools, and they cannot provide information unless they are accessed. Conversely, printed tools like shareholder newsletters and reports can be sent to all shareholders. Further, it is harder for information on websites to make a lasting impression, whereas the characteristics of printed media can be utilized in order to more-effectively communicate the company’s management strategies and messages from management. This can be accomplished through the use of innovate visuals, such as headings, and through the layout. Accordingly, such documents are an effective tool for deepening shareholders’ understanding of the company’s business activities.

Q13

What are the recent trends in shareholder newsletters and reports?

A13

Traditional reports were highly formulaic, limited in format and the number of pages, while offering minimal amounts of information. At times, they were practically no more than color copies of the business reports that were attached to notifications of shareholder meetings. These reports offered little to no information that was of genuine use to shareholders. Recently, however, there has been a trend toward bolstering the amount of information contained within these reports, including a wealth of information regarding management policies, growth strategies, and the financial condition of the company. Accordingly, the title of these reports has changed from “shareholder report” to “shareholder newsletter.” The number of companies publishing such newsletters is increasing steadily. Behind this trend, there is a growing awareness of the importance of communicating with shareholders to ensure that as many of them as possible invest in the company over the long term.

Q14

How are shareholder newsletters superior to traditional reports?

A14

Traditional shareholder reports generally consisted of an overview of the financial results, simple financial statements, and a formulaic president’s message. Moreover, the financial statements were limited to the fiscal year under review and did not offer comparisons with previous fiscal years. On the other hand, several companies have began enhancing the quality of the president’s message in their shareholder newsletters and bolstering the message’s content to better explain elements of the company, such as its medium-term management plan. Also, by including Q&A-style interviews with senior management, these companies are making their management policies and business strategies easier to understand. Further, these companies are implementing innovative measures throughout these newsletters in order to help deepen understanding of the company. These include revising the bland design of traditional reports and employing visuals that better incorporate the company’s brand image. Additionally, several companies have increased the number of times these newsletters are published from once a year to two or four times a year.

Q15

What are some specific characteristics of shareholder newsletters?

A15

Shareholder newsletters primarily consist of basic items such as (1) the president’s message, (2) an overview of the financial results, (3) a review of operations (segment information), (4) topics, and (5) financial information. It is common for these basic items to be combined with special feature sections on management plans, new businesses, and other aspects of the business. In addition to including financial information from several fiscal years in the financial statements, there have been movements encouraging the inclusion of information on trends in segment and product sales, as well as simple explanations of the financial statements. Further, some companies use these newsletters to offer information on their environmental initiatives and CSR activities. At the same time, there are companies that periodically attach surveys to their newsletters, enabling them to incorporate shareholder opinions into management. In this way, these newsletters are used as a tool to help companies understand the characteristics of their shareholder base.

Q16

What kind of shareholder newsletter is useful to private investors?

A16

First, if the shareholder newsletter is to be useful to private investors, it is important that it be easily understood by everyone. This is because there are a wide variety of private investors, all with differing needs. Investors vary from first-time investors to semi-professional investors, and can be of all ages. Second, the newsletter must offer a clear explanation of the company’s growth strategies. Investors base their investment decisions on a company’s future growth potential. Therefore, offering clear explanations of management strategies that take into account factors such as market fluctuations and the company’s position in the industry helps reassure investors of the company’s future growth potential. Third, the newsletter must offer thorough explanations of the concerns and risks that management faces. Transparent IR activities—those that do not try to hide information from shareholders—help to reinforce trust. Fourth, it is important that a company’s senior management communicate a message in their own words. This is the easiest way to bolster the faith of shareholders in management.

Q17

When is the best timing to publish shareholder newsletters?

A17

If possible, it is best to publish shareholder newsletters four times a year, in correspondence with the release of the quarterly financial statements. This is an effective way to increase the frequency of communication with shareholders. At the same time, it demonstrates management’s consideration of its shareholders, which in turns helps solidify the trust of shareholders. However, publishing newsletters quarterly places a great burden on the IR department of a company. Therefore, it is important that the content of these newsletters and the volume of content differ between each edition.