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Annual Reports

A recent survey of institutional investors in the western world showed that these investors place a 40% weighting on qualitative factors and intangible assets when making investment decisions. Quantitative factors, such as business performance and financial condition, play an important role in investment-related decision-making processes. However, this survey showed that quantitative figures are not absolute in the eyes of investors looking to buy a company’s future growth potential.

The most important element of developing an annual report is to focus on the strengths of the company’s management, extrapolate growth factors based on these strengths, and then communicate these growth factors in an easy-to-understand manner. Such strengths can include the quality of management, innovative growth strategies, market superiority of products and services, and the competitiveness of the company’s brand.

Specifically, rather than focusing on past performance, it is more effective to solicit the company’s management vision—what the company will look like in the future—and use this to communicate the company’s value as an investment. Accompanying this with messages from the company’s senior management that portray their passion for developing the company helps to communicate this value even more. These are the key points of developing a strategic IR communication tool.

In recent years, ESG (environmental, social, and governance) issues have come to be recognized as major factors to be taken into account when evaluating the risks toward a company’s future growth potential and the sustainability of its growth going forward. Accordingly, there is an increasing expectation for companies to include information regarding these issues in their annual report, in addition to inclusion in their sustainability report.

The Foundation of an Appealing Annual Report

The Foundation of an Appealing Annual Report (Chart)

PASSION: Communicate the passion of management

As a part of global society, local communities, and an industry, what sense of mission should a company have and what measures should it take to further develop its business and increase corporate value? An annual report should answer these questions, and send a clear message to shareholders and other investors on senior management’s passion for the company’s business. The value of an annual report increases greatly when it is carefully crafted to deliver these types of messages from the company, rather than simply providing a look back at the year under review.

VISION: Share the management vision

A company and its managers need to clearly convey the company’s management vision to gain the trust, understanding, and support of the market (shareholders and other investors). In other words, it must impress on its target audience what kind of company it wishes to be in the future. Also, it must fully describe the growth strategies and management targets through which this management vision will be realized, as these have an enormous power to persuade investors. A company’s management vision is the base on which its qualitative corporate reputation is constructed, and it serves the role of limiting adverse changes in how the market perceives the company.

CONFIDENCE: Communicate a sincere message

It is perhaps no exaggeration to state there are few, if any, institutional investors who make an investment decision without first consulting the annual report, and most are primarily interested in what senior management has to say. Investors are looking for a confident message from management regarding the company’s market position, management vision, and growth strategy. But regardless of whether past results have been strong or lackluster, a sincere, honest message from management appropriate to the company’s situation will strengthen the bonds of trust with investors.

DIRECTION: Introduce growth scenarios

It is not uncommon for shareholders and other investors to doubt the validity of the direction outlined for a company by its management. While steady progress has been made in the timely disclosure of financial information, such as through quarterly reporting, it has also led to a tendency for some investors to view companies only in the short term. As a result, they may fail to grasp a company’s long-term growth strategy and be unable to predict its future direction. It can be said that many shareholders and other investors often do not grasp the real intentions behind the direction management decides to take for the company. For these reasons, the annual report is a vital source of information for investors, as not only does it include comprehensive management data for the full fiscal year, but it is also an opportunity for investors to hear directly from the company’s senior management about their vision for the company.