January 18, 2013

Future Perfect? Frank Talk, Fine Returns

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By ROBIN GOLDWYN BLUMENTHAL

Read those CEO shareholder letters! Leaders who keep their word tend to run more efficient, productive, and successful companies.

If “language is the mother of thought, not its handmaiden,” as the Austrian journalist Karl Kraus said, investors ought to pay better attention to the way CEOs, the stewards of their capital, express themselves.

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William Weitzman for Barron’s Word Up! A new book explores the relationship between CEO communications with shareholders and stock returns. 

That idea is the premise behind a new book from McGraw-Hill that explores the relationship between stock picking and executive candor: Investing Between the Lines, by L.J. Rittenhouse. An investor-relations specialist, Rittenhouse has compiled an annual survey of CEO shareholder letters since 1999 that ranks 100 big companies based on seemingly unquantifiable metrics relating to corporate culture and candor.

“Our research shows that leaders who respect their word and honor their promises…run more efficient, productive, and successful companies,” says Rittenhouse, a former banker for Lehman Brothers.

Not exactly scintillating but worthy of investor attention, Rittenhouse’s annual company rankings have consistently shown a convincing link between executive candor and stock returns. Indeed, Rittenhouse raised a red flag on Enron before it failed, noticing a discrepancy between the net income cited in its CEO letter and its audited financial statement, among other things.

The latest survey, of the 2011 reports, found stocks in the top quartile outperformed the S&P 500 index by an average of 6.8 percentage points. On top: Church & Dwight, Alcoa, and Southwest Airlines . At the bottom: American International Group, Bank of America, and Cisco Systems. Word Up!