Georgia was a successful artist. She had never taken a business course in her life, nor picked investments. Her father was an experienced businessman and did this for her. When he died, Georgia inherited his portfolio of stocks and hired a manager.
Her new financial advisor, Russell, didn’t waste time and purchased three gold companies for her portfolio. With the economy heading south, he figured these investments would outperform the market. When he called to tell her what he had done, Georgia thanked him. Then she went to each company’s website to find their annual reports. After reading the letters to shareholders in each report, Georgia called Russell back. “Keep the stocks in two of the companies,” she said. “Sell the third.”
Russell was shocked and asked, “Why?” Georgia replied, “The shareholder letter by the CEO in that third company isn’t as candid or informative as the other two letters. It didn’t discuss the company’s financial results and used a lot of useless business jargon. It didn’t inspire trust.” Russell assured her that all three companies were sound, but Georgia was firm. He sold the stock.
Four months later, this company was charged with falsely reporting income. Its shares dropped to all-time lows, and Georgia was vindicated. Did she have insider knowledge? Had she carefully analyzed the financial statements? No. Georgia trusted her instinct that executive candor is a vital clue to investing with trustworthy leaders.
Perhaps you’ve read shareholder letters that failed to educate you about the business. Written in PR-speak, they hide the CEO’s true personality and leadership style. But, not all letters will waste your valuable time. Georgia’s experience taught her to invest with leaders who communicate clearly. As annual reports are released in the spring, read them and look for these three leadership qualities:
1) Reveals Leadership and Avoids Business Jargon: Consider these sleep-inducing phrases taken from some 2013 financial company shareholder letters in 2014: “the outstanding capabilities of our company,” “the strategy we outlined several years ago is driving growth,” and “help make financial lives better, through the power of every connection.” This business jargon fails to inspire confidence or build trust.
In contrast, Charles Schwab CEO Walt Bettinger opens his 2013 letter with a personal reflection about writing a shareholder letter: Some time ago, a close friend and I discussed the nature of the annual letters that CEOs write to their companies’ stockholders. He and I agreed the best approach was to craft the letter as if I were speaking with a colleague who had been away from the company for the entire year and to keep it free from spin or corporate-speak.
Bettinger’s language is straightforward and candid. He imagines what it would be like if he were the reader. His active verbs and simple descriptions engage us and begin to build connection that can lead to trust.
2) Provides Context and Explains “Why”: CEOs write a lot about what is happening in their businesses, and less about why this is important. JetBlue CEO Dave Barger does both in his 2013 shareholder letter. He is a master of meaningful context that reveals underlying business strengths and weaknesses. One such strength is the company’s strategy to constantly maintain a cost advantage relative to competitors.
Context adds credibility to CEO claims such as the airline’s 14-year old mission to “bring humanity back to air travel” through the “JetBlue Experience”. What can JetBlue passengers expect from this experience? Barger cites: “free inflight entertainment, the most legroom in coach of any U.S. airline…unlimited free snacks and great customer service.” But how does the company deliver great customer service? It nurtures an ownership culture that engages and rewards employees for going the extra mile for customers. How is this working? J.D. Power recognized JetBlue in 2013 as “one of only a few companies (and the only airline)” for service excellence in all of the past nine years.
3) Sets an Example by Reporting Successes and Failures: Berkshire Hathaway CEO Warren Buffett believes that a trustworthy CEO communicates candidly with investors – in just the way he would expect if their positions were reversed. In his 2013 shareholder letter, Buffett described Berkshire’s wide-ranging businesses from candy to machine tools and railroads to windmills. He admitted that while some businesses have enduring advantages and report growing profits, others “have very poor returns.”
Buffett took responsibility for these disappointing results. He wrote: “I simply was wrong in my evaluation of the economic dynamics of the company or the industry in which it operated.” In this and in past letters, he shares the lessons learned from these mistakes and how these helped him to find companies with sound economics. Like other successful executives and entrepreneurs, Buffett continues to perfect the skills of “failing wisely.
Why does straight talk matter?
As Georgia learned, words are the building blocks of trust. But not just any words. Only those that shine light into dark places — a definition of candor. Companies that lack candor will weaken trust and eventually stumble or fall apart.
To invest with trustworthy leaders, look for executive communications in which the CEO: 1) carefully uses words that grow revenues and trust; 2) explains the “what” and “why” of company actions; and 3) candidly sets an example by reporting on successes and failures.
J. Rittenhouse is CEO of Rittenhouse Rankings Inc., a corporate communications company that analyzes gaps in corporate candor to improve performance. A financial relations advisor and motivational speaker, L.J. has been featured on CNN and in The Wall Street Journal. Warren Buffett recommended her bestseller, Investing Between the Lines. For more information, please visit www.RittenhouseRankings.com.