PremiumWhat is the point of a chief executive’s letter to shareholders in the annual reports?
Simple. To tell current and potential investors about how the company fared and the road ahead.
One does not expect CEOs to be gifted writers like Gabriel García Márquez or Ernest Hemingway. But a good letter can be a promising pointer to realistic management. Understandably, some investors, like Warren Buffett, use a CEO’s letter as one guidepost to know if they want to invest in a company.
“Over the years, there have been multiple times reading the annual letter has been a factor in my deciding to do something or not to do something," Buffett has said in the past.
Twich+ read the CEO letter at each of the ten largest IT services companies to understand if investors are getting any wiser.
Sadly, it was disappointing. There is nothing groundbreaking in the CEO’s address to shareholders, and one comes out with little of the management's strategy.
Save for Tata Consultancy Services Ltd’s chief executive Rajesh Gopinathan, hardly any boss at a technology service company discusses how a company is preparing itself for the future. Gopinathan, who writes one of the most elaborate letters among all his counterparts, gives some insights into how India’s largest IT services company is preparing to become a $50 billion firm (Although Twich+ is not a fan of a company giving an aspirational target as TCS does well as it has not put a timeline by when it plans to achieve this target).
But it still falls short. Sample this.
In last year’s annual report, Gopinathan writes: “During the year, enterprises moved from thinking of technology-led innovation as a way of coping with pandemic challenges, to looking at it as a means of powering their growth and transformation (G&T), especially in the case of clients who had already moved their most critical workloads to the cloud. While G&T initiatives tend to be business focused and technology agnostic, immense possibilities for business transformation open up once enterprises move some of their workloads to the hyperscaler cloud."
“The pandemic has shown us that enterprise spending on technology is far more resilient than most people credit it for. It is central to organizations’ ability to innovate and differentiate in good times, and to survive and adapt in tough times," says Gopinathan.
It is not clear if Gopinathan is suggesting that TCS’s growth will remain resilient during a slowdown (an impending recession?).
We know from looking at two earlier recessions (in the aftermath of the dotcom crash and during the global financial crisis in 2008) that the growth of technology services companies was hit on account of Fortune 500 companies holding back their tech spending.
Has anything changed to make investors take a sanguine approach?
Pity, none of the CEOs have discussed this theme which is emerging as the number one worry for shareholders.
Second, CEOs appear to be inclined to congratulate their companies (and in turn themselves) on a record performance last year but shy away from discussing the complete picture.
Take for example the commentary on digital, the fuzzy buzzword.
Both Brian Humphries of Cognizant Technology Solutions Corp. and Salil Parekh of Infosys Ltd make it a point to underline the growth of the digital business: Cognizant claimed digital grew 19% and was 44% of its revenue at the end of 2021 while Infosys said the digital business grew 40% and totalled 60% of the $16.31 billion in revenue in the year ended March 2022.
Parekh’s statement implies that digital business totalled $9.8 billion when Infosys’s revenue grew 20.3%. But the chief executive does not mention what happened to the remaining business: Infosys’s legacy business declined 12.3% to $6.53 billion.
Should investors continue to expect this legacy business to keep declining? At what point does Infosys expect its entire business to become digital? And when the entire business is digital, will Infosys stand to make more dollars for every unit of service it has offered in the legacy business in the past?
Humphries too does not talk anything about this transition sweeping across the IT services industry.
Third, corporate twaddle needs to be shunned and it is time for some straight talking.
“We are resolved to make Cognizant the best place in the industry to build a fulfilling career," Cognizant’s boss Humphries assures shareholders.
Cognizant had industry-leading attrition over the last two years. But there is no commentary on what steps if any, the management is taking to retain talent.
“The future is digital, and Infosys is the leader in digital," Parekh signs off his one-page letter with what your writer believes is another blasé observation.
There is no denying that cloud computing and data analytics tools are in demand. But unlike Accenture Plc’s boss Julie Sweet, who shares revenue from some of the individual pillars of the digital, bosses at homegrown IT service firms still are not open to discussing what is driving the digital business.
Finally, one irritant is why would a CEO not share with shareholders if the news of his departure is already public?
On 6 May, Larsen and Toubro Infotech Ltd and Mindtree Ltd agreed to merge. The same day, LTI’s boss Sanjay Jalona resigned. Jalona finally left the company on 3 June. Upon completion of the merger, Mindtree’s chief executive Debashis Chatterjee will lead the combined entity, according to press releases issued by the two companies in the month of May.
Strangely, there is no mention of the merger in the annual report of either of the two companies.
Now, it could be argued that the annual report is a performance update for a year, and as the developments happened only in the current financial year, both the companies will make these disclosures in this year’s annual report. It is also possible that the news of the merger and Jalona’s departure came when LTI had already started work on its annual report.
LTI’s annual report came out on 17 June. But the company does manage to mention, albeit in two footnotes buried in the annual report, that Jalona was the boss until 3 June.
This makes your writer wonder if the CEO could have been forthcoming and even shared with shareholders on his journey with LTI over the last seven years. At the very least, Jalona could have shared this detail with shareholders when he is writing his letter as an outgoing boss.
Bosses at homegrown companies, across industries, are no better than the chief executives at IT firms when it comes to their letters to shareholders.
But when it comes to corporate governance and disclosure norms, the IT services sector has always been at the forefront: Wipro is a surrogate for Independent India while Infosys became a proxy for post-liberalized India, reckons Shankar Jaganathan, founder of CimplyFive Corporate Secretarial Services.
For this reason, chief executives at homegrown technology services companies should probably take a leaf out the best-run companies globally, and start having more candour about their success and failures and a lot less self-aggrandizement in their letters.
That hopefully will make CEOs in other industries become more forthcoming in their address to shareholders.
