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The Advantages of Stating Well-Defined Corporate Strategies in an Annual Report

Original post by Geri Terzo of Demand Media

Investors increasingly seek transparency in the financial markets, especially after the financial crisis in 2008 took many by surprise. A company that clearly states its corporate strategies in an annual report, which is an update that is designed for shareholders, might be rewarded with more patient investors. When change occurs at an organization and investors are in the dark about these shifts, certain shareholders might opt to sell shares rather than wait around to see how circumstances play out.

Contents

Identification

An annual report is distributed to equity shareholders each year before a company hosts its yearly meeting with investors. The report typically becomes available on the investor relations page of a company's website, as well. The information in the report is not only a reflection of the business that has transpired over the past year, but also offers a glimpse into the future direction of a business. An entire section in the annual report can be devoted to corporate strategy.

Standards

In its 2011 annual report, Mitsubishi Electric outlined its approach for using environmentally friendly practices in its business. The company recognized its focus on reducing carbon emissions and promoting recycling, both of which have the potential to resonate with socially responsible investors. This approach might benefit the company because socially responsible investors tend to be choosy. In some cases, ethical investment strategies might bypass the best short-term returns in favor of companies with environmentally sound principles.

Risk

One way to learn about a management team's risk tolerance is through the corporate strategy section in an annual report. In this document, an investor can learn the type of outside firms with whom a company is willing to do business. Also, a report that sheds light on the kind of access to cash a business may have can also be advantageous. A business that outlines a clear strategy for liquidity, which represents access to cash, may be better protected from insolvency, which can offer investors confidence.

Change

An investor may buy stock in a company in part because he or she understands the business model at the company. When there is a shift in strategy, it may throw some investors off -- especially during times of uncertainty. Following the economic crisis, transportation company Deutsche Post DHL made a major shift in its approach to expansion. Prior to the economic recession, the company grew by acquiring other businesses. In its 2009 annual report, the company stated that this strategy had shifted as a consequence of the economy and that the new strategy was to focus on organic growth.


                   

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About the Author

Geri Terzo is a business writer with over 15 years experience reporting on Wall Street. Her coverage ranges from institutional investing, including hedge funds and investment banking, to family topics and her career experience includes work for Fox Business, CNBC and "IDD Magazine." Terzo is a graduate of Campbell University, where she earned a B.A. in mass communication.


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