A study by researchers at the University of Nebraska-Lincoln supports what Warren Buffett has long said: CEOs often talk gobbledygook. Even more important, a chief executive's word choice often directly relates to the credibility and reputation of that CEO's company.
Janice Lawrence and John Geppert used computer programs to examine the language in 39 companies' annual letters to shareholders. Twenty-five were at the upper end and 14 were at the lower end of lists ranking corporations for social responsibility, ethics and reputation.
The lists used were Fortune magazine's Most Admired Companies 2002, Harris Interactive 2002 Corporate Reputation Survey and Business Ethics magazine's 100 Business Ethics Corporate Responsibility Report.
None of the companies studied were from Nebraska or Iowa, said Geppert, an associate professor of finance at UNL. Lawrence is an associate professor of accounting and director of the business ethics program at UNL.
High-reputation firms included 3M, IBM and American Express. Low-reputation firms included the famously failed Enron Corp.
The report, published in the journal Corporate Reputation Review, found that differences in word style in letters to shareholders could be used with 81 percent accuracy to classify a firm as having a high or low reputation.
Corporate Reputation Review is produced in association with the Reputation Institute, a worldwide organization founded in 1997 to increase information about corporate reputations and to provide assistance to companies wanting to measure and manage their reputations.
“You can tell things about the company from the tone, the words and phrases they use in the letter,” Lawrence said. “You may call them ‘weasel words.'”
A spokesman for the Securities and Exchange Commission, whose responsibilities include preventing corporate abuses, said the commission would not immediately comment.
“We're reviewing and evaluating the study,” said SEC spokesman John Heine.
Although the researchers didn't study Buffett's letters to shareholders, Berkshire Hathaway is a respected and well-regarded firm whose CEO uses active, concrete, short and simple words, Lawrence said. Companies with poorer reputations tend to use vague, complex and repetitive phrasing, she said.
Buffett has said he begins his annual letter to shareholders by imagining that he is writing to his sisters, whom he calls intelligent women but not experts in accounting or finance.
CEOs could improve their companies' reputations simply by striving for that matter-of-fact, concrete and active writing style, the researchers said.
Lawrence and Geppert also said financial auditors could study the linguistic style of shareholder letters for clues as to whether a company should be examined more closely for deceptive practices.
The researchers said they applied the computer analysis to other firms not on the lists, including American Home Mortgage Investment Corp., which filed for bankruptcy protection in 2007 as the subprime mortgage crisis hit. It has recently begun liquidating its assets.
In April of this year, the company's founder, former chairman and chief executive agreed to pay nearly $2.5 million to settle federal civil charges of accounting fraud and concealing the company's worsening financial condition.
A possible clue to trouble came as early as 2005, Geppert said, when CEO Michael Strauss' letter to shareholders used a word style similar to low-reputation firms, with little concreteness and a high degree of complexity.
Similarly, a 2007 letter to shareholders from American International Group used complex and vague language, Geppert said. The federal government bailed out AIG last September as the insurer faced financial collapse.
Chief executives seeking to improve their writing styles might heed Buffett's advice in the SEC's “Plain English Handbook”: pretend they're writing to a specific person.
“No siblings to write to?” Buffett writes. “Borrow mine. Just begin with ‘Dear Doris and Bertie.'”
Contact the writer:
444-1117, joe.ruff@owh.com
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