Laura Rittenhouse’s Candor Analytics; Inspired by Warren Buffett, a former Lehman analyst figures out that plain-speaking companies have higher performance

September 3, 2013

Sally Helgesen is an author, speaker, and leadership development consultant, whose most recent book is The Female Vision: Women’s Real Power at Work(with Julie Johnson; Berrett-Koehler, 2010).

Laura Rittenhouse’s Candor Analytics

Warren Buffett’s annual shareholder letters are famous, a key element of his mystique. Inevitably, they’re described in the business media as “folksy.” But this description misses the reason these letters compel admiration from and influence the behavior of investors. The true strength of Buffett’s missives lies in their candor. (For example, here’s Buffett in the 2012 annual report of his firm Berkshire Hathaway, on his controversial investments in local newspapers: “Charlie and I believe that [some newspapers] will remain viable for a long time. We do not believe that success will come from cutting either the news content or frequency of publication. Indeed, skimpy news coverage will almost certainly lead to skimpy readership.”)Plain-spoken candor is so rare in corporate communications that it’s not surprising it gets dismissed as eccentric, of a piece with Buffett’s continuing to live in the modest home he bought in the Omaha, Neb., suburb of Dundee in 1958. But candor is the currency that engenders trust, both among stakeholders and within a culture. And trust is precisely what Buffett has built over decades, in part by offering annual letters that avoid jargon and boilerplate.

In 1997, Laura Rittenhouse, a former Lehman Brothers corporate finance executive, had an aha! moment when reading one of Buffett’s shareholder letters. She had started an investor relations company after leaving Lehman in the early 1990s to help clients communicate more effectively with investors.

Buffett’s candor inspired her. Instead of trying to sell a strategy or blame external factors for a strategy gone wrong, he used plain English to share the essentials of what he was seeing, what he was thinking, and how his judgments informed his buys. On impulse, she wrote Buffett to tell him that his letters had expanded her understanding of candor and had given her a template for helping other companies be more forthright. Buffet wrote right back to tell her she was “doing the work of angels” and inviting her to his 1998 shareholder meeting.

Realizing she had to quantify candor in order to convince CEOs of its value, Rittenhouse set about developing a system of “candor analytics.” Adapting techniques used by forensic investigators and SEC analysts to determine whether someone is telling the truth, the system awards points for words, phrases, and linguistic patterns that indicate transparency. The system also deducts points for FOG, or “fact-deficient, obfuscating generalities”––clichés, jargon, incomplete explanations, euphemisms, platitudes, and contradictory statements. By 2000, Rittenhouse had compiled a 100-company list representing a range of industries and began offering the Rittenhouse Rankings, which grades CEO shareholder letters, teleconference scripts, and other forms of corporate communications.

FOG, Rittenhouse points out, can be either toxic or benign. Toxic FOG is used deliberately to disguise performance, strategy, or intent, with the lack of clarity serving to obscure results. Benign FOG results when lazy thinking shades into lazy speech. Rittenhouse notes an example of the latter that emerges with almost hilarious frequency in CEO shareholder letters of recent vintage: the constant recourse to a “climate of uncertainty” as an all-purpose explanation for timid responses, misguided decisions, or poor performance.

Rittenhouse correlates her candor scores with share performance. In 2012, for the seventh consecutive year, companies in the top quartile outperformed bottom-quartile companies, 32.4 percent to 17.1 percent. (You can find her 2012 rankings, also known as her “candor and corporate culture survey,” here.) Between June 2011 and June 2012, the average returns of top-ranked companies increased 9.9 percent, while low-ranked companies experienced a 5.7 percent decline. Top-ranked candor companies included Costco, Southwest Airlines, Travelers, Ford Motor, and Home Depot, whereas the companies that ranked highest in obfuscation were Cigna, Humana, Hewlett-Packard, and Bank of America.

Rittenhouse’s method comes under fire (for example, in some comments on theAmazon page for her book, Investing between the Lines: How to Make Smarter Decisions by Decoding CEO Communications [McGraw-Hill, 2012]) by those who believe it lacks rigor or is not quantified enough. “Investors say to me, ‘Why not just look at the numbers? Numbers are precise, whereas words are not,’” Rittenhouse says. She counters that words always inform the numbers. “Numbers are only as accurate as a company’s accounting, and accounting reflects judgment. For example, a company will decide to count this metric but not that one, and that decision will determine how the numbers come out––we got a close look at how this works in 2008. A company can be aggressive in how it interprets the numbers––Enron is the classic example. Or it can be conservative, like Berkshire Hathaway. In either case, it behooves investors to take a look at the quality of the conversation in the organization. That will tell them if the judgments that inform the numbers should be trusted.”

Numbers are notoriously poor instruments for describing culture, so Rittenhouse’s insights about the power of candid speaking seem especially relevant for organizations undergoing or trying to implement culture change. Culture is embedded in words, and being aware of the quality and accuracy of the words top leadership uses is essential in reshaping a culture or making it more congruent with the company’s mission. As Rittenhouse notes, analyzing the conversation in a company is the best way to understand its culture and assess its capacity to inspire trust––among investors, the public, customers, clients, and employees. Because culture change always challenges trust, using boilerplate or jargon to try to effect it will inevitably undermine the effort. Candid language offers a better path.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: