August 7, 2013

The Least Candid Companies

By Alexander E.M. Hess and Douglas A. McIntyre – Originally published on

While many investors may think corporate communication is unclear, some companies are far more candid than others. In fact, According to corporate communications consulting firm Rittenhouse Rankings, clear and transparent language in investor letters is indicative of reliable performance.

Generally, investors assess a company’s performance by studying key financial metrics. But another useful strategy, according to Rittenhouse Rankings, is to study the language rather, than just looking at the numbers. By reviewing the language in the letters to shareholders, Rittenhouse Rankings evaluates how transparent a company is with the public. According to the report, some companies, including Cigna and Hewlett-Packard, have released letters that are confusing and lack details that would allow shareholders to better understand the company.

Rittenhouse Rankings reviews annual letters to shareholders in order to assess candor and FOG, or “fact-deficient, obfuscating, generalities.” Companies benefit in the study by demonstrating their candor and are penalized for including so-called FOG language. FOG language provides little, unclear or non-specific information about a business, and it is usually jargon.

In an interview with 24/7 Wall St., Rittenhouse Rankings President Laura Rittenhouse said that companies that are less transparent with their shareholders may have problems communicating candidly within the company as well. “If the CEO is communicating to the owners with this degree of obfuscation, it’s likely [he or she is] communicating this way internally,” explained Rittenhouse. As a result, employees do not know what to do, she said.

The least candid companies not only produced a large amount of unspecific jargon in their shareholder letters, but, notably, they also often failed to demonstrate leadership and vision. The average company in the top 10 scored more than 3.5 times as many points in the category than the bottom 10. Top companies also received nearly three times as many points for leadership than the least candid companies.

Rittenhouse Rankings’ data do not take into account several other documents that might be used as a means for analyzing candor. Among these are SEC filings and public comments by senior management. However, the shareholder letter in a public company’s annual report is an important opportunity for the CEO to articulate to all investors the most important highlights of past, present and future operations of the company. If this letter is deficient, it may point to a flaw in management’s ability to disclose the information most critical to shareholders.

In order to assess candor and FOG, the 2012 Rittenhouse Rankings Culture & Culture Survey reviews annual letters to shareholders written by the CEO. Companies then receive points for demonstrating accountability, leadership, strategy and vision, among other factors. These points are then totaled and compared to the amount of FOG — or “fact-deficient, obfuscating, generalities” — these letters contain. Companies with the highest ratios of FOG to statements that show candor receive the lowest grades. The shareholder letters used by Rittenhouse Rankings for all the 10 least candid companies are from 2011. The companies included in the survey initially were selected in 2000, based on four criteria: capitalization, financial performance, Fortune 500 reputation and industry representation. Companies are replaced in the study if they cease to exist, or do not publish a shareholder letter.

10. ConAgra Foods Inc. (NYSE: CAG)
> 1-yr. share price change: +50.83%
> Industry: Processed and packaged goods

ConAgra fell dramatically in the survey this year from 56th to 91st out of 100 companies, after failing to maintain the focused and honest presentation of previous letter to shareholders. While the 2010 letter provided detailed information about the company’s efforts on meeting customers’ financial and nutritional needs, the 2011 letter used generalizations such as, “We know people want great-tasting, everyday food for every dollar they spend.” Because it detailed far less specific information in 2011 than the year before, ConAgra’s scores fell in accountability and leadership, among other factors.

9. American International Group Inc. (NYSE: AIG)
> 1-yr. share price change: +53.35%
> Industry: Property and casualty insurance

AIG’s 2011 shareholder letter barely exceeded 800 words, about a quarter of the length of its average letter over the past decade. The company also received poor scores for failing to demonstrate strategy and accountability in the letter. The insurance giant provided little information on how it would meet its goals of growing its businesses, cutting its costs and improving its investment returns. Beyond offering to buy back shares, the company also did little to explain how it would grow earnings and returns to shareholders. In May, Goldman Sachs downgraded AIG, claiming that even if the company’s property and casualty insurance business improved as expected, it still would not provide desirable returns to shareholders.

8. Cisco Systems Inc. (NASDAQ: CSCO)
> 1-yr. share price change: +60.31%
> Industry: Networking and communication

Despite being among the least candid companies, Cisco actually improved in the survey from its rank of 98 last year. Cisco provided investors with information about its cash balances and cash flow in its 2011 shareholder letter, one year after failing to make any mention of the topic. In its 2011 letter, the company also provided concise information on how it had generated $10.1 billion in cash during fiscal year 2011, and how it planned to return much of that cash to shareholders. However, when it came to describing what sets Cisco apart, the company spoke only in general terms, when it should have provided more specific information. Cisco also received especially poor marks for its lack of vision, which helps shareholders know how a company is innovating and working to accomplish its goals.

7. Tim Hortons Inc. (NYSE: THI)
> 1-yr. share price change: +8.01%
> Industry: Restaurants

Tim Hortons is new to the Rittenhouse Rankings, but it had an auspicious debut. Its 2011 shareholder letter was one of the shortest included in the survey and still contained far more FOG than useful information. Among the factors that drove down its score were the limited use of helpful financial metrics and an extremely vague statement of the company’s “value proposition” to consumers. Recently, an Edward Jones analyst told The Vancouver Sun that the coffee and doughnut chain’s inability to distinguish its brand in a competitive environment was a major hurdle preventing it from achieving the same success in the United States as it has achieved in Canada.

6. Avon Products Inc. (NYSE: AVP)
> 1-yr. share price change: +47.95%
> Industry: Personal products

Avon is one case that illustrates the importance of language in investor materials, Rittenhouse told 24/7 Wall St. Investors “were not discriminating when [former CEO] Andrea Jung kept touting her messages of growth,” Rittenhouse said, yet reading between the lines revealed language full of contradictions. Jung’s support eroded after the company’s profits began to slide, a probe into overseas bribery was launched and the company rejected a takeover bid from Coty Inc. While the company was ranked for Jung’s letter, the introduction of Sherilyn McCoy as CEO has helped the company become more candid with shareholders. Rittenhouse Rankings praised McCoy’s 2012 shareholder letter as being direct, addressing the critical roles of customers and associates, and touting the company’s strengths and values.

5. L’Oreal S.A. 
> 1-yr. share price change: +28.14%
> Industry: Cosmetics

L’Oreal was penalized for the use of run-on sentences and ambiguity in its 2011 shareholder letter. One sentence that typified the presence of FOG — sentences that consist of cliches or make little sense — is the French beauty company’s claim that it “has made the most of the diversity and complementarity of its presence in all channels and in all regions to take advantage of the sectors which are accelerating.” Rittenhouse Rankings may be in line with Wall Street analysts in failing to identify what might set the company apart. One analyst from Sanford C. Bernstein told Bloomberg in late 2012 that they believed L’Oreal was just “an average beauty and personal care company.” Results from its most recent quarter also failed to impress shareholders or research analysts.

4. Bank of America Corp. (NYSE: BAC)
> 1-yr. share price change: +97.04%
> Industry: Banking

Bank of America’s 2011 shareholder letter represented an improvement from the year before. The major reason for this was the company’s decision to cut the amount of content from its letter that the study considered to lack facts, confuse readers or consist largely of generalizations. As a direct result, the bank improved its position from second-lowest on the previous survey. However, the 2011 letter failed to adequately answer several key questions, including what the bank considered to be “clear-cut” about its business model, and which metrics it was using to identify its own “risk appetite.”

3. Hewlett-Packard Co. (NYSE: HPQ)
> 1-yr. share price change: +44.79%
> Industry: Computer systems

Hewlett-Packard’s 2011 shareholder letter was the first from Meg Whitman, who had at the time recently unsuccessfully ran for governor of California. Her first letter failed to demonstrate accountability or leadership, according to Rittenhouse Rankings, as fact-deficient generalizations were more common than candor. In one sentence that exemplifies the absence of clear or specific claims, Whitman stated, “[W]e have strong leadership from the consumer markets to the commercial, the industry’s broadest portfolio, unmatched reach and scale, and an exceptionally talented and committed workforce.” In late 2012, Whitman admitted that the company had pursued strategies inconsistently. Despite current attempts to right the ship, HP would not experience growth until fiscal 2015, she said.

2. Humana Inc. (NYSE: HUM)
> 1-yr. share price change: +46.38%
> Industry: Health care plans

Humana’s shareholder letter was roundly criticized by the study as being non-specific, filled with unverifiable claims and rich in jargon. Among Humana’s meaningless or unsupported claims were that it was “the first health benefits company a decade ago to insist on putting the consumer at the center of the health-benefits equation,” and that it possessed “a willingness to enter into unconventional partnerships for the sake of improving outcomes.” Analysts at both Citigroup and Stifel Nicholaus recently downgraded Humana. There also have been concerns about how the Affordable Care Act will affect the company’s bottom line.

1. Cigna Corp. (NYSE: CI)
> 1-yr. share price change: +84.79%
> Industry: Health care plans

No company was less candid than Cigna, whose 2011 shareholder letter included numerous run-on sentences and excessive amounts of jargon, according to the study. In one of its strongest criticisms, Rittenhouse Rankings noted that Cigna used “rhetorical nonsense” in its claims. In one part of its shareholder letter, the company said that it was “harnessing this transparency,” in regards to helping plan participants “conveniently track health care costs.” Cigna’s claim that it was promoting “higher levels of proactive service utilization and greater clinical quality” was also criticized as vague. According to Rittenhouse Rankings, Cigna’s letter failed to build trust with shareholders.