Come Again?

CEO Letters Talk the Talk

AN INVESTOR MIGHT WELL BE EXCUSED FOR SKIPPING over the sometimes impenetrable CEO letters to shareholders -- a fixture of the annual report -- and heading straight for the financials. But according to one expert, that would be a mistake.

Not only are the letters a way to understand a company's corporate culture, says L.J. Rittenhouse, head of Rittenhouse Rankings, an investor-relations and strategic-advisory firm, but she has found that her rankings of the annual CEO missives of 100 of the nation's biggest companies have also been a reliable predictor of financial performance. In each of the years from 2002 to 2006, the average stock prices of the 25 top-ranked companies in the survey have outperformed the bottom 25 the following year. Rittenhouse notes that investor Warren Buffett considers CEO letters in deciding whether to invest in a company.

The rankings measure the clarity of the discussion of such matters as capital stewardship, strategy and accountability. This year saw a 21% rise in unclear statements -- what Rittenhouse calls "fog" -- from the 2006 reports, and an 85% rise from five years ago. Examples: "We maintain relationships with...institutions with whom we continuously search for a more profound understanding of the skin we live in," from No. 97 Estée Lauder (ticker: EL); and "We remain fresh, relevant and original by knowing what to change without changing what we know," from 94th-ranked Coca-Cola (KO).

This year, electrical-parts maker Eaton (ETN) topped the list, up from 33. Placing second and third were Entergy (ETR) and Wells Fargo (WFC). Bringing up the rear was Humana (HUM), a health-plan provider whose stock has already fallen 25% in the past year.