June 1, 2013

CEO Candor and Survivability

We’ve seen that Bank of America and Citigroup’s letters have been riddled with fact-deficient, obfuscating, generalities (“FOG”).  So why would you or anyone want to read a shareholder letter?  Perhaps the chart below will change your mind.  It plots the annual CEO Candor Scores for Wells Fargo, Bank of America, Wachovia and Merrill Lynch from 2002 to 2010:

Rittenhouse Rankings CEO Candor Scores

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What can you learn from this chart?  (1) See that Merrill Lynch never excelled in candor rankings during the entire period.  In 2008 it was acquired by Bank of America. (2) In 2002, Wachovia ranked in the middle of the candor benchmark, dropped in 2003 and then peaked in 2004, two years after it merged with First Union Bank. After 2004, Wachovia’s candor’s scores dropped steadily until it was acquired by Wells Fargo in 2008; (3) In 2002 and 2003, Bank of America ranked in the top candor quartile and then drifted to the middle. After 2008, it began dropping to the bottom of the candor rankings.  (4) Wells Fargo was a consistently high candor performer from 2002 until 2008.  It also has dropped in candor since the 2008 global meltdown, but not as much as Bank of America.

In other words, Bank of America and Wells Fargo are the only banks standing.  Their CEO Candor Rankings correctly predicted corporate survivability.  Why?  Companies scoring high in candor typically offer clearer direction, more focused execution and produce superior results.  They elicit trust from customers, employees and investors.  Given recent trends, however, can these two banks continue to survive?

 

Savvy investors who follow these trends might adopt Warren Buffett’s first rule of successful investing: Don’t lose money.  Rule #2 is also important: Don’t forget Rule #1.