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You are here: Home / Investing / Corporate Governance: When Words Speak Loud

Corporate Governance: When Words Speak Loud

We discuss the quality of language used by companies in their annual reports and other investor communication, and suggest why this may be a result and indicator of governance or mis-governance.

In August 1998, the US stock market regulator, Securities and Exchange Commission (SEC) released a book called A Plain English Handbook.

Now, you may wonder, “What business does a stock market regulator has to focus on plain English?”

The SEC released this handbook to show corporate managers, especially CEOs, how they could use well-established techniques for writing in plain English to create clearer and more informative disclosure documents like annual reports, while meeting all legal requirements.

The preface of the handbook was written by none other than Warren Buffett – the man who writes the world’s best shareholders letters – and this is what he wrote –

For more than forty years, I’ve studied the documents that public companies file. Too often, I’ve been unable to decipher just what is being said or, worse yet, had to conclude that nothing was being said.

There are several possible explanations as to why I and others sometimes stumble over an accounting note or indenture description. Maybe we simply don’t have the technical knowledge to grasp what the writer wishes to convey. Or perhaps the writer doesn’t understand what he or she is talking about.

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