The Clarity Clue
Posted by David Foster on May 6th, 2008 (All posts by David Foster)
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 The Edifice Clue, The Harvard Indicator, and Readin’, Writin’, and the Business Shtick.
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.)
May 6th, 2008 at 9:56 am
The physicist Richard Feynman said that if you really understood a subject you could explain it to anyone. He was talking about physics but I think the principle applies to any area.
I think that the clarity of the CEO letters reflects their understanding of their companies operations. If they have a handle on what is going on, they can explain things clearly and precisely. If they’re confused about the company, their writing is confused.
May 6th, 2008 at 10:55 am
Also mean to mention: in yesterday’s Financial Times, Lucy Kellaway sees much present-day business jargon as descended from late-60s hippie-speak.
May 6th, 2008 at 1:08 pm
C.Northcote Parkinson had something to say on edifice complexes being a sign of a has been organisation. The Admiralty offices near Trafalgar Sq.(1909) and, I hope,The NY Times’ shiny new HQ opposite PA Bus Terminal.
May 7th, 2008 at 9:20 am
David Mullins ended each Corporate Financial Reporting class with an exposition on how the cover of the annual report really contained all the signals you needed to make a decision about the company as valid as one based on the information behind it. But that was before LTCM
May 7th, 2008 at 11:14 am
I remember that investment author Peter Lynch entusiastically agrees with you Renmimbi;
He would visit corporate HQs and count fancy diggs as a definite negative indicator when evaluating a company’s stock price and potential as an investment.
May 7th, 2008 at 12:21 pm
Great point. And broad application - look at 80’s and 90’s lit crit in terms of style; look at countries - and cities within US - where dictators/corrupt politicians argue their opulent life styles are not only entitlements due their skills but, more, their luxury makes their constituents happy - makes them feel respected. This is countered by a world in which Franklin bragged of being a Franklin (middle class) and Adams of the size of his manure pile.
(Forwarded this post to my friends who teach tech writing. They love it.)
May 8th, 2008 at 9:58 am
Meh. I see the arrow of causation running in the other direction. CEOs are not stupid. They can write clearly. Not having spent much time in academia they’ve been forced to write clearly.
When the company is running well, they can afford to write clearly, in fact they must - it gives greater punch to the good news.
When things are in the crapper they try to paper the situation over with fancy words.