A clue to the future performance of a company may be found in the literary style of the CEO’s annual letter. That’s the opinion of Laura Rittenhouse, head of an investor relations consulting firm, who has studied this topic extensively.
A study found that when the letters are analyzed for clarity versus jargon, shares of bottom-ranked companies lost more than 18 percent of their value in a two-year period ending in 2002, compared with a 12.7 percent drop for the top-ranked companies. More recently, another Rittenhouse study focused on newly-appointed CEOs and their content scores versus those of their predecessors. For the group with the highest gains in content scores, stock prices increased an average of of 28.4% (in the year after the new CEOs were named) versus an average decline of 10.5% for the ground with the greatest declines in content scores.
The usual cautions about cause and effect analysis–correlation is not causation, the direction in which the arrow of causality is pointing is not always obvious–of course apply. Nevertheless, this is interesting.
Here’s a presentation which provides a little bit of detail on the Rittenhouse analysis method. Ms Rittenhouse quotes Orwell:
If thought can corrupt language, then language can corrupt thought
…and offers her own version:
If language determines actions and results, then corrupt language will lead to debilitating actions and unsatisfactory results.
See also this comparing writing at J P Morgan in 1933 and in 2006. (Although I thought Jamie Dimon’s letter in the recent annual report was pretty good–not sure what the Rittenhouse analysis process would have to say about it.)