How words translate into value for shareholders

By Noelle Brennan (GSB ’16)

Laura Rittenhouse PictureLaura Rittenhouse, CEO of investor relations firm Rittenhouse Rankings, discussed the value of candor in financial statements with students from Smart Woman Securities and the Finance Society on Wednesday, March 12. A former investment banker and current entrepreneur, Ms. Rittenhouse shared her insights on how to measure CEO trustworthiness, a reliable indicator of wealth creation and destruction and discussed how business leaders can use this technology to boost sales and improve margins.

She made the case that there is a direct correlation between candor, which she defines as “straightforwardness in attitude and speech,” and stock performance. To illustrate her point, she asked students to sort through some shareholder letters to find evidence of what she’s termed “F.O.G.,” which stands for fact-deficient, obfuscating generalities. These examples demonstrated that companies high in F.O.G. tended to perform poorly in the market while statements that were marked with candor – those that were explicit in their communications regarding business opportunities, corporate strategy and vision – performed better overall.

So what does this tell us? It seems that words reveal the trustworthiness of a company’s management team. When shareholder letters are transparent and specific, Rittenhouse, author of Investing Between the Lines, says that they should be valued.  And while conventional wisdom tells us that precision is just a numbers game, Ms. Rittenhouse’s models tell a different story: Words speak to the accuracy of numerical data and can be more important than numbers because they give insight into managerial integrity.  In fact, interpreting words could be the key to deciphering advantages in the market.

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