While many investors may think corporate communication is unclear, some companies are far more candid than others. In fact, According to corporate communications consulting firm Rittenhouse Rankings, clear and transparent language in investor letters is indicative of reliable performance.
Generally, investors assess a company’s performance by studying key financial metrics. But another useful strategy, according to Rittenhouse Rankings, is to study the language rather, than just looking at the numbers. By reviewing the language in the letters to shareholders, Rittenhouse Rankings evaluates how transparent a company is with the public. According to the report, some companies, including Cigna and Hewlett-Packard, have released letters that are confusing and lack details that would allow shareholders to better understand the company.
Rittenhouse Rankings reviews annual letters to shareholders in order to assess candor and FOG, or “fact-deficient, obfuscating, generalities.” Companies benefit in the study by demonstrating their candor and are penalized for including so-called FOG language. FOG language provides little, unclear or non-specific information about a business, and it is usually jargon.
In an interview with 24/7 Wall St., Rittenhouse Rankings President Laura Rittenhouse said that companies that are less transparent with their shareholders may have problems communicating candidly within the company as well. “If the CEO is communicating to the owners with this degree of obfuscation, it’s likely [he or she is] communicating this way internally,” explained Rittenhouse. As a result, employees do not know what to do, she said.
The least candid companies not only produced a large amount of unspecific jargon in their shareholder letters, but, notably, they also often failed to demonstrate leadership and vision. The average company in the top 10 scored more than 3.5 times as many points in the category than the bottom 10. Top companies also received nearly three times as many points for leadership than the least candid companies.
Rittenhouse Rankings’ data do not take into account several other documents that might be used as a means for analyzing candor. Among these are SEC filings and public comments by senior management. However, the shareholder letter in a public company’s annual report is an important opportunity for the CEO to articulate to all investors the most important highlights of past, present and future operations of the company. If this letter is deficient, it may point to a flaw in management’s ability to disclose the information most critical to shareholders.
In order to assess candor and FOG, the 2012 Rittenhouse Rankings Culture & Culture Survey reviews annual letters to shareholders written by the CEO. Companies then receive points for demonstrating accountability, leadership, strategy and vision, among other factors. These points are then totaled and compared to the amount of FOG — or “fact-deficient, obfuscating, generalities” — these letters contain. Companies with the highest ratios of FOG to statements that show candor receive the lowest grades. The shareholder letters used by Rittenhouse Rankings for all the 10 least candid companies are from 2011. The companies included in the survey initially were selected in 2000, based on four criteria: capitalization, financial performance, Fortune 500 reputation and industry representation. Companies are replaced in the study if they cease to exist, or do not publish a shareholder letter.