LOVE it or hate it, Management’s Discussion and Analysis (MD&A) provides a window on details behind earnings and other key performance numbers. But is the MD&A a bastion of storytelling and plain language? Probably not.
So how can you capture a reader’s attention and communicate clearly and effectively in the MD&A? The answer is to use the same tactics and tools that make annual reports informative: clear language, logical structure and effective presentation. Together, these ensure that the MD&A is as interesting and engaging as it is understandable.
Plain and simple, yet effective
In my last article, I wrote about Warren Buffett’s famously open and honest shareholder letters in Berkshire Hathaway’s annual reports. The highly effective writing style used in that letter doesn’t stop at Buffett’s signature line. Berkshire’s MD&A is equally communicative.
The tone of Berkshire’s MD&A is different – it’s more matter-of-fact – but readability doesn’t suffer because of it. Why? Because, like the shareholder letter, the writer – who I assume is not Buffett because he surely has better things to do – has used an active voice, plain language and personal pronouns. So rather than the typical “the Company” or “the Corporation”, the MD&A speaks directly to the reader by referring to “our business” and “we conduct.”
While good graphic design also improves readability, you won’t find a shred of it in Berkshire’s annual report. And there’s nothing resembling a theme, except perhaps the utter rejection of one. But that approach works. Indeed, the report’s clutter-free, straight-to-the-point style reflects Buffett’s public persona.
Get out of the rut
With the MD&A increasingly viewed as a critical component of a company’s story, the challenge is to make it an interesting read. Berkshire’s MD&A includes a couple of elements that add interest by breaking from tradition and providing valuable information.
First, it includes an “An Owner’s Manual” for shareholders. Originally published in 1996 and regularly updated, this five and a half page booklet explains Berkshire’s broad principles of operation. Second, the MD&A includes a copy of a two-page memo from Buffett to Berkshire Managers (“The All-Stars”). The memo discusses the need to zealously guard Berkshire’s reputation and succession planning (the manager’s, not Buffett’s).
These two elements help keep the MD&A fresh and interesting. Other companies, however, use the same boilerplate year after year. The MD&A should fully reflect today’s reality, not yesterday’s. Things change. So get out of the rut of repeating language from previous years and get into a new groove with new content.
Integrate from cover-to-cover
Integrated reporting that combines required financial reporting with voluntary corporate social responsibility (CSR) reporting has become a hot topic of sorts lately. However, a more fundamental form of integration is required before CSR reporting gets added to the mix. And that’s integrating all components of the annual report – operational, MD&A, financial statements and theme material – to create coherent, consistent messaging from cover to cover.
The readability of many annual reports comes to crashing halt at the start of the MD&A, along with graphic design and plain language. The result is a bolted-together appearance that reflects a silo approach to business: communications or investor relations write the front of the book, finance writes the MD&A and the auditors prepare the financial statement and notes.
The annual report should, however, unite everyone in an effort to provide consistent messaging. Especially since trends suggest that the MD&A may just be where many readers begin reading. So get the CEO and other management involved early in the process to identify key messages and themes.
Add reader-friendly elements
In addition to plain language and graphic design to improve understanding and transparency, consider adding some of these reader-friendly elements to your next MD&A:
- a table of contents
- an executive summary
- clearly defined sections with active subheads
- vertical lists to break up long sections
- fully captioned graphs and charts to support the narrative
- a letter or brief report from the CFO
One last point: Review the notes to the financial statements for plain language. The wealth of information contained in the notes is quickly devalued by poor writing. Plus, the introduction of International Financial Reporting Standards (IFRS) in Canada this year will make the notes even longer.
Making financial information clearer and more meaningful is an ongoing challenge. But as Buffett says about guarding Berkshire’s reputation: we can’t be perfect but we can try to be.