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.
In some cases, moreover, I suspect that a less-than scrupulous issuer doesn’t want us to understand a subject it feels legally obligated to touch upon. Perhaps the most common problem, however, is that a well-intentioned and informed writer simply fails to get the message across to an intelligent, interested reader. In that case, stilted jargon and complex constructions are usually the villains.
Buffett closed his preface with a writing tip to CEOs –
One unoriginal but useful tip: Write with a specific person in mind. When writing Berkshire Hathaway’s annual report, I pretend that I’m talking to my sisters. I have no trouble picturing them: Though highly intelligent, they are not experts in accounting or finance. They will understand plain English, but jargon may puzzle them. My goal is simply to give them the information I would wish them to supply me if our positions were reversed. To succeed, I don’t need to be Shakespeare; I must, though, have a sincere desire to inform. No siblings to write to? Borrow mine: Just begin with “Dear Doris and Bertie.
If you have read annual reports in the past, like me, you must have wondered what the top managers were smoking while approving the same.
Despite the fact that most investors are neither lawyers, accountants nor investment bankers, most annual reports – even excluding the legal stuff in them – is written in anything but plain English.
Contrast this with what Buffett wrote in his 1979 letter to shareholders and has repeated several times –
…perhaps 90% of our shares are owned by investors for whom Berkshire is their largest security holding, very often far and away the largest. Many of these owners are willing to spend a significant amount of time with the annual report, and we attempt to provide them with the same information we would find useful if the roles were reversed.
Most likely, CEOs of a large majority of other companies that produce complex text in their annual reports do not even consider this situation of reversing the roles with their shareholders.
Here’s Buffett in his 1983 letter (emphasis is mine) –
We will be candid in our reporting to you, emphasizing the pluses and minuses important in appraising business value. Our guideline is to tell you the business facts that we would want to know if our positions were reversed. We owe you no less. Moreover, as a company with a major communications business, it would be inexcusable for us to apply lesser standards of accuracy, balance and incisiveness when reporting on ourselves than we would expect our news people to apply when reporting on others.
We also believe candor benefits us as managers: the CEO who misleads others in public may eventually mislead himself in private.
LJ Rittenhouse has written an amazing book titled Investing Between the Lines: How to Make Smarter Decisions By Decoding CEO Communications. It introduces several methods for evaluating the financial integrity of a company through a reading of its publicly available information.
Rittenhouse writes that you don’t need special access to “insider” information or a degree in accounting to figure it out. In fact, the secret is right in front of you – in black and white – in the words of every shareholder letter, annual report, and corporate correspondence you receive.
In the chapter on Executive Communications and Performance, Rittenhouse writes –
Anyone looking for information in shareholder letters knows how difficult this can be. Many are littered with jargons and platitudes. But when investors tell me they can’t understand what a CEO is trying to say, they have already gained vital information. If the communication doesn’t make sense or is full of spin, ask yourself: Does the CEO not understand the business, or is he hiding something? Did the board of directors and the executive team read the letter? If so, why didn’t anyone tell the CEO it needed a critical review?
The question that arises here is that if you as an investor cannot make sense of a company’s communication, why should you trust its management, let alone its accounting numbers?
Of course, actions speak louder than words. But when it comes to a company’s communication with shareholders, the kind of words CEOs and their cohorts use speaks out loud about their intentions.
Now, it’s not just that much of the stuff CEOs write in their letters and other communication is difficult to understand; it is written not to be understood.Mark Twain once observed that he would never “write ‘metropolis’ for seven cents when I can write ‘city’ and get paid the same.”
Unlike Twain, the authors of most of today’s financial documents often choose the equivalent of “metropolis” and then add a disclaimer saying that they could have used “city” or “municipality” or “settlement” or even “organized location where large numbers of homo sapiens congregate or live.”
Like, take a look below at the extracts from the Chairman’s letter from Suzlon’s FY14 annual report.
The quality of English used in this is proof that this was written by a public relations firm and not the Chairman himself. And then, just check some of the terms used.
How many of the readers of this annual report would understand terms like “greens shoots”, “liability management”, “buoyancy”, “unlocking”, “rebalancing”, “non-core assets”?
When they can write “repayment of debt” or repayment of borrowings”, why do they write “liability management”? And I have always gotten confused by this term “non-core assets”! All assets are core (sorry, important) to a company’s business. And if they are truly not that important, why do they find mention in a Chairman’s report?
Then, “rebalancing” is one of the most misused word you would hear from the CEO/Chairman of a company that has made blunders in the past and now wants to get back on track (that’s the meaning of rebalancing) to make more such blunders in the future (so, the rebalancing isperpetual).
The worst part is that you would never read a word “sorry” from such CEOs for the faux pas (oh sorry, read ‘mistake’) they committed in the past.
Most annual reports and other such financial disclosures are written not to inform readers but to protect the provider of the information. That’s because most issuers of equities, debt and other investment instruments are deeply afraid that if they wrote plainly, someone might actually understand what was at stake.
Not just companies, even the language financial advisors use can tell a lot about their real intentions. Arthur Levitt wrote this in an article in Wall Street Journal –
When someone has to tell you about the riskiness of a financial product, his or her impulse is always to dull the senses and reduce the likelihood of alarm. There’s a legal and psychological urge to keep people from knowing that the huge sums they are about to invest are subject to sudden disappearance, so that possibility is buried in an avalanche of impenetrable verbiage. The truth would be too shocking.
Imagine what would happen if an investment banker said or an IPO prospectus read: “You could lose your shirt if you buy this.”
Are All Guilty?
While most CEOs are guilty of …..there are some who are not of fooling investors with complex language and words.
Take the example of Hawkins Cookers and its Chairman Brahma Vasudeva who has been using plain English while talking to the company’s shareholders over the past many years. His AGM speeches are a treat to read.
Here is something he said during in his speech to shareholders in 2009, while laying down first of the seven strands of the DNA of Hawkins…
Principle No. One: Follow the Golden Rule: Do unto others as you would that they do unto you”. Since we want to be treated fairly and reasonably by all who deal with us, this rule obliges us to deal equally fairly and reasonably with all who come into contact with us. This includes employees at all levels, vendors of goods and services, dealers and consumers. We do it because we believe it is the right thing to do. It also tends to build positive relationships and trust in all who deal with our company and with our brands.
How simpler can that get?
Then, in his latest AGM speech in 2014, here is what he said (the emphasis is mine)……in the current year, in the first five months, our sales are increasing at a rate which is almost 2.5 times higher than the sales increase in 2013-14. At the same time, I would like to remind shareholders of what we wrote in the Director’s Report for the year 2013-14: The higher magnitude of first quarter increases in the current financial year is partially because of the low base effect of the corresponding quarter in the previous years and are unlikely to be sustained through the coming quarters of the current year. Nevertheless, we believe that the good start in the first quarter of the current year augurs well for the results that we expect in the year 2014-15.” Nothing has happened since then to change our assessment.
How more honestly can a Chairman speak about his company’s business?
So yes, there are CEOs and Chairmen who talk and write in plain English because they have nothing to hide behind complex language. But to differentiate such managers from others, it’s important for you as an investor to read annual reports and other communication that companies share from time to time.
Plain Words are Your Friends
Before I end, let me share an advice from American humorist Will Rogers – I love words but I don’t like strange ones. You don’t understand them, and they don’t understand you. Old words is like old friends—you know ’em the minute you see ’em.
Then, here’s an advice for CEOs from the legendary Irish poet WB Yeats – Think like a wise man but communicate in the language of the people.
I’m sure you would not buy an investment from a stranger. So why buy one covered in strange language?
- Companies make or lose money. They are never “buoyant”.
- Companies improve or worsen their balance sheets. They never “rebalance.”
- Companies borrow and lend money. They never do “liability management”.
As an investor, plain words are your old, familiar friends. It’s time you seek them from the companies whose stocks you own, or are looking to own.
P.S. If you are a CEO, analyst, blogger, or just someone who wished to learn how to write in a way people would understand, you must read the book Elements of Style by Strunk & White.