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The New Economy

How to tell when the boss is dodgy

By / May 15, 2009

Bernard Madoff, chairman of his own investment firm, pleaded guilty to 11 felony counts in March for a multibillion-dollar Ponzi scheme that caused huge losses among individual and institutional investors. He's scheduled to be sentenced next month.

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Can you trust the people who run the company you work for and the firms you invest in?

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Here's one suggestion: Read them. Carefully.

A recent study found that the CEOs' annual letters to shareholders could be quite illuminating. By looking at three years' worth of letters from 39 firms, two professors at the University of Nebraska-Lincoln found that the heads of high-reputation companies used clearer, more direct language than those of low-reputation corporations.

Straight-arrow speech

"The good guys use shorter words, fewer words – and the words they do choose are concrete words," said Janice Lawrence, director of the university's business ethics program and coauthor of the study with finance Prof. John Geppert. "The bad guys use more adjectives; their words are longer; and the words aren't as concrete. I jokingly call them – maybe not so jokingly – weasel words."

Here's an example from the study: “As a leading provider of low-cost mortgage capital for home buyers to finance their homes, our firm is at the center of the housing industry, one of the strongest growth sectors in America.”

OK, the letter is a little dated. The housing industry was one of the strongest growth sectors in America. Now compare that to this message from another CEO: "… we remain committed to being good stewards of our asset base and to taking action regarding under-performing assets wherever possible.”

Which one should you trust? The first one, the researchers said. He uses clearer language than Mr. Under-Performing Assets.

Picking the winners

When the researchers ran the letters through their content-analysis software, they could correctly sort out the CEOs at high-reputation companies from those at low-reputation firms 81 percent of the time.

Can the average investor pick up those nuances as well as the software?

Maybe not, Professor Lawrence said in an interview. But forewarned is forearmed. You can trust your judgment.

"We've all had times when someone gave a talk and you feel they just talked all around the issue and didn't get right down to it," Lawrence said. "That's your gut responding to this."

And maybe that's reason enough to take a second look before you buy those shares or sign the employment contract.

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Have you had encountered dodgy CEO language? Comment or Twitter us.

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