William Waitzman

Read the Letter, Do the Math

Keeping CEOs Honest

IN THE MIDST OF THE BUSY ANNUAL-MEETING season, when chief executives are out in force, it's important to watch not just what they do, but what they say.

Perhaps one of the best ways to gauge how well our corporate leaders are "talking the talk" is through the much-maligned and oft-ignored shareholder letter in the annual report. According to investor-relations specialist Laura Rittenhouse, the quality of disclosure in these letters can serve as an important indicator of a company's financial health -- and even its stock performance.

So much so that Rittenhouse, who has been using 140 data points to rank letters of 100 companies for candor and comprehensive disclosure for the past 12 years, has found significant stock-price outperformance among the top-ranked companies. For example, in this year's ranking of the letters for 2008 (and released in 2009), the top 10 companies saw an average price drop of just 5.5% from the crisis year of 2008 through 2009, compared with the 27% decline suffered by the bottom-ranked companies.

"This survey is for people who want to sleep at night," says Rittenhouse, author of Buffett's Bites, which distills principles of investing in well-run, wealth-creating businesses from Warren Buffet's shareholder letters. "It's very likely you can trust that the best will keep on performing," Rittenhouse says.

Edison International took the top spot this year, while Humana placed dead last. One disturbing trend: a handful of companies whose letters talked about "solid results" reported losses.