Some companies are great for sharing information with stockholders and the market, even when it hurts. Others tap dance around issues and hope nobody notices. Which type of company is a better investment?
According to L.J. Rittenhouse, the investment markets reward companies that are forthright and open. The former investment banker and president of Rittenhouse Rankings studies the effects of CEOs’ willingness to communicate upon the stock prices of their companies.
She says that only about a third of S&P 500 companies have CEOs who do a good job of communicating, but those who do achieve better returns. For example, highly ranked Amazon.com has seen its stock price increase more than 14,000 percent since its 1997 IPO. At the other end is Cisco Systems, whose CEO uses a lot of jargon and confusing language. That company has lagged behind the S&P 500 index by nearly six percentage points for the past five years.
She also cites a correlation between CEOs who use clichés and weasel wording and poor performance, comparing that to Warren Buffett’s comments regarding Berkshire Hathaway’s ill-timed investment in ConocoPhillips: “Even if prices should rise, the terrible timing of my purchase has cost Berkshire several billion dollars.” That’s amazingly candid, but it’s normal for Buffett.
Many corporate leaders think that shareholders, customers, and other stakeholders don’t really pay much attention to what they say. Or they think their choice of words is so smart that it fools the mere mortals out there. Rittenhouse’s survey provides clear evidence that when it comes to corporate communications, candor and honesty are definitely the best policies.