Measuring and assessing tone at the top using annual report CEO letters

Chief Executive Officers (CEOs) traditionally have placed a strong value 
on the creation of unified corporate cultures, devoted to the achievement 
of strategic objectives. They strive to create a ‘tone at the top’ that will 
set a powerful example for important internal and external stakeholders. 
CEO letters to shareholders in annual reports are a potentially 
important vehicle for communicating the attitudes, values and 
behaviours of those in senior leadership roles.

These letters deserve much closer examination and auditor scrutiny than has occurred in the past. 

They are authorised and signed by CEOs, many of whom participate 
pro-actively in their composition. CEOs have a legal responsibility for 
the content of their letters, and because of this, the letters are a useful 
medium for assessing the intentions of CEOs as they struggle to set a 
tone at the top. For example, they can be crucial in showing how CEOs 
interpret important external challenges and how they visualise solutions 
to whatever problems their organisation is currently facing.

The growth in CEO power in recent decades further highlights the 
importance of this issue. Simultaneously, there has been a growth of 
‘heroic’ models of leadership, which encourage many CEOs to exaggerate 
their proficiency, level of insight, and ability to command events (many 
of which are beyond their control). A growing concern has developed 
in the USA regarding the tone at the top of organisations, especially 
after the collapse of Enron in 2001 and the passage of the Sarbanes-Oxley Act in 2002. The financial crisis of 2008 and the onset of global 
recession have also raised critical questions by the public, policy makers 
and media about the manner in which CEOs perform their role. How 
CEOs respond to this heightened scrutiny will be a vital issue for the 
global economy in the years ahead. 

CEO letters to shareholders therefore have a great importance. This 
study of their content over the past decade has the potential to reveal 
how CEO mindsets function in a period of global boom and expansion, 
and help us to assess such matters as risk management policies and 
practices. An understanding of these matters is of relevance to auditors 
and others who are interested in obtaining early indications of potential 
future problems