Practical analysis for investment professionals
12 February 2014

How Understanding CEO Candor Can Make You Money

My experience in investment management has taught me that half of the analysis battle is waged in the qualitative realm. Chief among these qualitative concerns is the honesty and character of management. Are they representing the truth of their firm’s past, present, and future? When character meets communications you have candor.

Laura Rittenhouse, CEO of Rittenhouse Rankings, founded her firm to evaluate the candor of corporations. The rankings have proven to be predictive of the future stock performance of the rated businesses. I interviewed Laura recently about her work and think you will benefit from her insights.

Jason A. Voss, CFA: What exactly is a Rittenhouse Ranking?

L.J. Rittenhouse: A Rittenhouse Ranking is a score that measures the amount of candor in executive communications. Specifically it reveals:

  1. Investor confidence in the accuracy and reliability of corporate accounting;
  2. CEO expertise in building trustworthy and execution-advantaged corporate cultures; and
  3. The likelihood that executive teams can produce superior and consistent financial results over time.

What inspired you to create Rittenhouse Rankings?

About 20 years ago, after leaving Lehman Brothers, I started an investor relations, corporate crisis, and reputation business. I knew from my investment banking experience that CEOs were smart about capital raising and allocation, but did not know how investors valued their leadership. As CEO reputation was becoming a key factor in share valuation, this knowledge was growing in importance. Business consultants and academics estimated that 40–60% of share valuation was influenced by perceptions of CEO leadership.

I offered a unique service: to help CEOs see themselves as others saw them. To accomplish this, I showed clients how they reported on company results, opportunities, and strategies, and contrasted these descriptions with those of competitors. The differences were often stark. Clients began to see how their communications strengthened or weakened trust. They saw how their communication choices could impact valuations.

Can you correlate candor rankings and financial performance?

Yes. Over time, I developed a model to code and score the presence and absence of candor in CEO shareholder letters. My team and I scored positive reporting (engaging, informative) and negative reporting (evasive and confusing) to measure the quality of executive leadership.

Our term for negative candor is “F.O.G.” which stands for fact-deficient, obfuscating generalities. We quantified CEO candor by totaling positive and negative candor scores, and ranked survey companies from high to low. By comparing candor rankings over the past seven years, we found that companies highest-ranked in candor consistently outperformed, on average, the lowest-ranked companies.

Are you saying that cultural values determine the reliability of the accounting numbers? If this is so, why do investors tend to dismiss qualitative analysis?

Investors always tell me how important it is to understand the quality of the corporate culture in valuing companies. They believe it takes years of experience to learn how to do this. So when I say I can teach how to expertly judge corporate cultures in just three months, they are amazed.

Investors tend to dismiss qualitative analysis because they are seduced by the precision of numbers. They forget that precision does not ensure accuracy. Furthermore, investors forget that countless judgments are made within a company about when to count cash, how much to count and where to report it. These judgments produce the financial statements.

In other words, the accuracy of Berkshire Hathaway’s financial reports in the dot-com era depended on corporate values that were very different from Enron’s.

How is an investment professional’s annual earnings season analysis improved by utilizing your work?

A great deal of “insider” information is gained from listening to an earnings call and deciphering the subtext of corporate messages, the degree of CEO engagement in the call, and the vitality of Q&A. I listen carefully for clues that indicate whether a company is on track to execute strategy and produce results; and if management can be trusted.

First, I evaluate the delivery of the prepared remarks. Are the speakers conversational and confident or are they robotic and uncomfortable?

Second, does the teleconference script address important investor skepticism, or does the company ignore critical and controversial issues?

Third, are investor questions respectful or do they reveal frustration, discomfort or petulance? I also note if the questions are open-ended and show that investors are engaged in the story and results, or whether they are model-related questions that indicate investor disinterest, skepticism, or doubts about the corporate outlook.

What is the biggest criticism of your work?

Investors who don’t understand our analytic process believe our findings are too subjective. After all, words are slippery and can have many meanings. I tell them:

  1. We have defined coding protocols for each of the topics we score in an executive communication. These standards allow my analytic team to make consistent judgments over time and among companies from different industries.
  2. Our iterative process requires at least three independent reviews of the coding and scoring for each company communication.
  3. Every iteration will result in coding and score changes. However, after about three to five different iterations, (depending on the length of the letter), we will have made coding and scoring changes, and the total score will be almost identical to the prior iteration score.

In other words, each letter has an inherent communication value measured by a numeric score. (Like the Greeks who believed in a quantifiable universe.) Our process is geared to finding that fundamental number.

What is the biggest contribution of your work?

As I describe in Investing Between the Lines, our annual CEO candor surveys have contributed the following:

  1. Predictive negative values: Before the market noticed danger signals, the Rittenhouse CEO Candor rankings anticipated spectacular corporate failures by analyzing the communications of Enron, HealthSouth, BP, MF Global, and AIG (2007);
  2. Predictive positive values: By identifying year-over-year candor ranking trends for companies, we have identified positive value breakouts. For instance, when Alan Mulally published his third shareholder letter as Ford’s CEO in 2009, his ranking jumped to 7th place in survey up from 85th the prior year. (Ford’s ranking averaged 84th over the prior three years.) The result showed us that the cultural changes Mulally was introducing at the company were taking hold. Since that time, the stock has increased over 600%.
  3. CEO Succession: By contrasting candor scores in the letters of an outgoing and incoming CEO, we can judge the cultural fitness of the incoming CEO. For instance, our analysis of outgoing Home Depot CEO Arthur Blank’s letter and incoming CEO Bob Nardelli’s first letter highlighted a cultural mismatch that proved harmful to customers, employees, and eventually, investors.

Your work is based on candor, yet don’t you have a built-in conflict of interest?

None of my clients are included in our annual candor benchmark survey. Yes, I finance the annual survey work by consulting for executive teams to help turn candor into a corporate competitive advantage and trust builder. But if a company in our survey becomes a client, we drop them from the public survey.

In addition, the candor survey is most useful as a screen to identify companies that deserve more time and effort to dig into corporate financials and determine if the numeric analysis supports the candor findings.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

Photo credit: ©

About the Author(s)
Jason Voss, CFA

Jason Voss, CFA, tirelessly focuses on improving the ability of investors to better serve end clients. He is the author of the Foreword Reviews Business Book of the Year Finalist, The Intuitive Investor and the CEO of Active Investment Management (AIM) Consulting. Voss also sub-contracts for the well known firm, Focus Consulting Group. Previously, he was a portfolio manager at Davis Selected Advisers, L.P., where he co-managed the Davis Appreciation and Income Fund to noteworthy returns. Voss holds a BA in economics and an MBA in finance and accounting from the University of Colorado.

Ethics Statement

My statement of ethics is very simple, really: I treat others as I would like to be treated. In my opinion, all systems of ethics distill to this simple statement. If you believe I have deviated from this standard, I would love to hear from you: [email protected]

8 thoughts on “How Understanding CEO Candor Can Make You Money”

  1. JM says:

    While I tend to abide to your methodology and reported results, I wonder what your company’s consulting services imply to investors: apparent candor that actually is not there?

    1. Hi JM,

      Would you mind clarifying your question, I’m uncertain of what you are trying to ask.

      With smiles,


  2. Ben Fox says:

    Great interview, Jason. Qualification of executives is an area in which I’ve found woefully little literature, let alone good literature. It’s a definite gap in my knowledge – and I’m guessing it is for many others – and one that I feel will produce disproportionate results on my future investment analyses.

    Bumping Investing Between the Lines to the top of my reading list.

    1. Hi Ben,

      Thanks for weighing in with your experiences. Yes, I think this is a massive gap in the understanding of businesses. As you know, the words of executives carry huge weight in building of valuation models. Yet, can you trust them to be candid and honest? Hard to say.

      I think you will enjoy Ms. Rittenhouse’s book, I found it innovative and charting new territory.

      With my usual smile!


  3. Santa Fe Real Estate Hack says:

    I would be interested to know if wrist watch/ wrist size asymmetry or perhaps its corollary, gratuitous bling-itude, at all factor into a Rittenhouse Ranking? Outward appearances can speak volumes about motivation, as can margin accounts. Sigh.

    1. Hello Hack (and Friebaum Watcher)!

      Great question…I am guessing that the heart of it is: what about hubris? Do they look at hubris?

      To my knowledge bling-itude is not factored into Rittenhouse Rankings directly. However, they do scrutinize literally every word of conference calls, Ks and Qs, and annual reports. They have created a database of words that they think indicate a lack of candor. These they track over time as indicators of future equity performance. They don’t just look at words in isolation, though. Rankings also incorporate the overall presentation of facts, degree of evasiveness, how execs treat shareholder questions, an evaluation of hubris, and much more. Rittenhouse Rankings has tried to make this subjective process as objective as possible.

      With smiles!


  4. Redgage says:

    Excellent article! This is the very important fundamentals of evaluating transparency and candor, L.J.’s Candor Analytics could be a great tool for judging the “spin” content of corporate messages.

    Thanks !!

    1. Hello!

      Thank you for your kind words and for taking the time to comment. L.J. is obsessed with providing tools to help evaluate spin. You may also appreciate this series of videos that feature L.J. that I hosted earlier this year:,AAABE5oc3_E~,Leu10fA0D1tIyVYcYVwT9BC1i23Tymh4 Last, I have also done a lot of work on lie detection. Here on Enterprising Investors just search on “lie detection” and it should point you to some of this content.

      Yours, in service,


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