A shareholder letter is a letter presented by the company's top management to the shareholders of the company wherein the shareholders are informed about the material events relating to the company's operations that took place during the year.
The letter includes the details of the company's annual financial results, the market conditions faced during the year, proposed plans, changes in the stock price, and other important matters. Therefore it is a formal communication to the shareholders from the management to keep them informed about the achievements, plans, and challenges of the business. The document offers a detailed insight into the company operations and also addresses concerns of the shareholders.
. Shareholder letter refers to a note that the company's senior management enables its shareholders with information about significant events concerning operations during the year. It consists company's yearly financial performance, the market circumstances encountered throughout the year, projected plans, stock price changes, and other crucial issues.
Introduction and motivation, financial results, accomplishments, market conditions, plans and measures, and acknowledgment are all conventional components of a letter.
Using this document, management and its shareholders can communicate directly. Moreover, the administration can update the shareholders on the company's operations, financial results, notable successes, challenges, actions taken, upcoming events, and plans.
Shareholder Letter Explained
A shareholder letter is a formal document given by the management of the company to the shareholders. It is a very effective means of communication through the company gives an overview of the business including its performance, strategic planning and forecasts for the future, the financial results, etc.
A well written annual shareholder letter serves as an important method to inform the shareholders about the opportunity, risks, the achievements and growth plans. The achievements and accomplishments of the business are very well highlighted in this document. It acts as a bridge between the shareholders and management creating faith and transparency.
There are some tips for writing a good shareholder letter –
Highlight the achievements of the company, and do not just go over describing the business activities only.
Provide insight into what the investors may see in the coming future, i.e., the milestones the company intends to achieve in the following year and how the company expects to achieve them. When talking about the milestones, be reasonable.
Appreciate the employees or the executives to let them know as well as the investors that the company values its employees. . It should also highlight the commitment of the business towards ethical issues, corporate governance and make efforts to handle sustainability issues well.
Talk about how you run the business as investors may need to recall how the company runs the business and what its purpose is.
It is acceptable to acknowledge the problems faced during the year. Mention the problems along with the factors which lead to those problems.
Thus, the letter should address even the potential risks, uncertainties and challenges that the business is currently facing or expecting to face in future.
The annual shareholder letter must give a clear idea about market conditions, trends of the business demand and other issues, the level of competion, its present position in the industry, the efforts being made by the company to stay ahead of peer companies to not only retain the current market but also gain new customer base.
Overall, it is an essential tool which is used for creating faith, and effectively communicating the essential information of the business to shareholders.
Template
A standard letter contains the following topics or headings –
#1 - Introduction and Motivation
In this section, the management describes the company's affairs, its goals, mission, and the principles that the company follows, along with a brief welcome note to the readers.
#2 - Financial Results
This section of the shareholder letter format highlights the company's financial results during the year. The company's performance is in terms of revenue and profits of the various branches or undertakings are reflected along with highlighting the reasons that lead to such performance. Apart from revenue and income, an overview can also be given concerning other aspects such as loans, capital, and market share.
#3 - Achievements
In this section, the management discusses the achievements met by the company during the year. It could include information about opening new branches or business verticals, capturing market share, new investments, innovations, inventions, partnerships, etc.
#4 - Market Conditions
Here, the prevailing market conditions in the industry in which the company operates are described. The effect of such conditions, whether positive or negative, shall also be mentioned here.
#5 - Plans and Measures
In this section, investors get an update about the measures adopted by the company to improve its overall conditions. Also, the plans proposed for the upcoming years are discussed with their expected outcomes.
#6 - Acknowledgement
The shareholder letter format ends with an acknowledgment note wherein the management concludes their thoughts and thanks the investors and other stakeholders such as employees for their continued support.
How To Write?
Collect Information
Get in touch with the product heads, financial heads, and other top executives to get an idea about the star products and services, revenue, growth, profitability, projections and plans, challenges faced, achievements met, and other relevant data. Frame the data in the form of notes.
Organize Data
Once you have gathered the relevant data and the notes, bifurcate them into relevant sections or headings. After sorting the data into headings, formalize the data by way of paragraphs and pointers under each other so that a basic outline of the letter is ready.
Finalize the Letter
After the outlining, formalize it and add a nice introduction and an acknowledgment of the letter. Highlight the information wherever necessary to gather attention to such areas. Carry out the proofreading of the document to assure that the document is free from any error.
Why Do We Need A Shareholder Letter?
A shareholder letter is a vital document. Through this document, the management can communicate with its shareholders directly. By way of this document, the management gets a chance to give the shareholders an insight into what the company is up to, its financial results, key achievements, challenges, actions taken, upcoming events, and planning. Thus, the letter provides information about what the company has been up to, what it intends to do, and what the investors can look forward to if they stay with the company.
Example
Let us understand the concept with the help of a simple and suitable example.
Following is a draft letter from a company named ABC Inc. which deals with motor cars:
Dear Shareholders,
I begin the letter with the utmost pride for the company and its dedicated employees throughout the country and abroad. Keeping in mind the economic changes that the country is facing, I am happy to announce that the company has achieved excellent results not just financially but also in operational terms as we continue to add new clientage and audiences and expand throughout the globe.
In the year 2018-19, we continued to expand and were able to increase our revenues by 24%. Along with the increased revenues, the company was able to enhance its profits to $20 million, an increase of about 18% compared to last year. We intend to continue with a trend in the coming years also.
We enhanced our geographical presence by opening new branches at seven different locations. Also, we opened five new manufacturing plants during the year. We plan to add up locations abroad for operational efficiency and greater reach.
As you must be aware, the automobile industry suffered an all-time low this year. Thus, even we suffered and could not meet the expected target of increasing revenues, which was targeted by 35%. However, we managed to reduce the effect of industry stress and hailed through the same.
In the end, I would like to present my heartfelt gratitude to the shareholders and the employees for their continued support and confidence in us.
Yours Sincerely,
CEO
ABC Inc.
Frequently Asked Questions (FAQs)
What is the difference between a letter to shareholders & a quarterly report?
Quarterly reports are official records that adhere to the SEC's regulations. A quarterly report is very well organized, containing listings of financial data and unbiased analyses of the data. A letter to shareholders is sent to them specifically and might be neutral.
Who writes the letter to shareholders?
The management of a firm writes a shareholder letter to the shareholders informing them of its activities for the year. The annual financial results, market circumstances, significant accomplishments, difficulties, and future goals are all included in the shareholder letter.
Where can I find the shareholder letter?
The shareholder letter is often prepared once a year and is presented at the start of the company's annual report. It is typically available online in the investor relations area of a business's website.
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