© 2015 rittenhouse rankings, inc


Rittenhouse Rankings 2013 Culture & Candor SurveyTM

EXECUTIVE SUMMARY

CANDOR ANALYTICS TO DECODE CORPORATE CULTURE

Rittenhouse Rankings decodes corporate culture by measuring the amount of candor in

corporate communications. This measure allows investors, customers, employees,

directors, suppliers, journalists, and policymakers to quantitatively gauge the strength or

weakness of internal trust in a company and to predict future performance. Rittenhouse

Rankings’ Candor Scores reveal an “inside’” view of corporate culture and have been

endorsed by Warren Buffett.

The Rittenhouse Rankings Culture and Candor SurveyTM is based on in-depth, iterative

readings of shareholder letters. Financial analysts objectively and systematically

evaluate CEO commentary using protocols that help them identify strategic context,

innovative ideas, capital stewardship practices, financial results, competitive advantages,

mistakes, and customer focus. They search for key words, phrases and business

concepts and award positive points when these are found.

Candor scores help CEOs to identify gaps in corporate communications, which reveal

corporate vulnerabilities. These gaps can increase operational and financial risks and

erode performance if not recognized. Executives who address these gaps will strengthen

execution, protect corporate reputations and deliver better results. Candor rankings

reveal which CEOs are creating the most engaging and informative communications.

Financial linguistic analysts deduct points when they find commentary that includes

clichés, business jargon, incomplete explanations of key business topics, confusing

explanations, and omissions of key ideas or facts. These codes highlight negative candor

or F.O.G., an acronym for “Fact-deficient, Obfuscating, Generalities”. Other F.O.G. codes

include euphemisms, platitudes and contradictory statements.

Rittenhouse Rankings calculates a total score by combining positive candor points and

negative points for F.O.G., and then rank orders the representative sample of 100

Fortune 500 companies to create an annual benchmark of executive corporate candor.

This allows companies to measure their relative communication strengths and

weaknesses.


The Rittenhouse Culture and CEO Candor Rankings analytic tools are in the forefront of an

emerging field in financial analysis: “Financial Linguistics”.

This field focuses on the value of words as well as numbers in analyzing shareholder

value. It recognizes that linguistic analysis helps investors, boards of directors,

customers and employees to gauge the integrity of corporate accounting, culture and

management and to predict future results. Other financial linguistic players include:

The Securities & Exchange Commission which has developed powerful linguistic search

software to analyze MD&A and other corporate reports to identify potential accounting

fraud.

High-frequency traders who use linguistic search software to monitor stock market

sentiment and to position trades.

Business Intelligence Advisors (BIA) and also credit analysts at Valens-Credit Inc., who

are trained in forensic analysis, apply these techniques to analyzing quarterly earnings

teleconferences so they can determine if CEOs are telling or hiding important

information.

Why does Financial Linguistics provide trusted, actionable insights? Because language is

central to human behavior and determines business success or failure. In short: words

shape and determine actions which create the future.

Institutional Investor reporter Jan Alexander described this work in How to Tell if a CEO is

Lying: www.institutionalinvestor.com/article/3427665/banking-and-capital-markets-corporations/how-

to-tell-if-a-ceo-is-lying.html#.VWSp6kb9zZ8

“Data is an outcome, but people create the data,” says Jason Voss, a content director at the CFA

Institute in New York and a former portfolio manager for Davis Selected Advisers, a Tucson, Arizona–

based fund manager. Much of Voss’s work involves seeking out analytical strategies and ways to train

analysts and investors to probe deeper into a senior managers’ psyches. Other research groups working

in this field include Business Intelligence Advisors, a Boston company founded by former intelligence

officers, which uses a proprietary behavioral assessment model to evaluate the information that a

company discloses.

Laura Rittenhouse, a former Lehman Brothers corporate finance executive whom Voss calls one of the

foremost researchers in financial forensics, is the president, founder and CEO of Rittenhouse Rankings in

New York, a corporate consulting firm that advises clients how to develop their inner detector of

corporate spin. Rittenhouse publishes annual rankings of 100 companies in the Fortune 500, known as

the “CEO Candor and Corporate Culture Survey.” The survey, which comes out each April, rates

companies according to what their executive communication reveals about such qualities as strategy,

leadership, accountability and stakeholder relationships. Rittenhouse has found a close correlation

between high stock prices and executive candor in the eight years she’s been doing the study. Using a

detection method she calls F.O.G. — fact-deficient, obfuscating generalities — she subtracts points for

jargon and illogical statements.

http://www.institutionalinvestor.com/article/3427665/banking-and-capital-markets-corporations/how-to-tell-if-a-ceo-is-lying.html#.VWSp6kb9zZ8

http://www.institutionalinvestor.com/article/3427665/banking-and-capital-markets-corporations/how-to-tell-if-a-ceo-is-lying.html#.VWSp6kb9zZ8


KEY FINDINGS: DO WORDS MATTER?

The Candor scores in the 2013 Survey ranged from top-scoring Charles Schwab to ConAgra which

ranked at the bottom of the Survey. Ten companies repeated in both the top-candor quartile and

the bottom-candor quartile compared to the 2012 Survey.

2013 Rittenhouse Rankings Culture & Candor SurveyTM

Table 1: Top and Bottom-ranked Quartile Companies

Top-ranked in Candor Top-ranked in F.O.G.

2013 Rank Company

2013 Rank Company

1 Charles Schwab 100 ConAgra Foods*

2 Pitney Bowes 99 Johnson & Johnson*

3 Southwest Airlines* 98 Comcast

4 General Mills 97 Microsoft

5 Costco* 96 Citigroup

6 Amazon.com* 95 AIG*

7 Alcoa 94 Cigna*

8 JetBlue Airways* 93 Merck

9 CSX 92 Motorola

10 FedEx 91 PepsiCo

11 Air Canada 90 Bank of America*

12 Thermo Fisher* 89 Estee Lauder

13 Siemens 88 eBay

14 Lockheed Martin* 87 Harley-Davidson

15 CBS Corporation* 86 ExxonMobil*

16 Ford Motor* 85 L'Oreal*

17 Eaton* 84 Exelon

18 Fiat 83 News Corp*

19 Hewlett-Packard 82 DuPont

20 Home Depot* 81 Kellogg

21 Foot Locker 80 McDonald's*

22 Capital One 79 Southern Company

23 Schlumberger 78 General Motors

24 Church & Dwight* 77 Wal-Mart*

25 Wells Fargo 76 IBM

*Companies that repeat in the Top or Bottom-25 Ranking in the 2012 Survey.


1. Candor Scores and Market Performance

From the end of June 2013 to the end of June 2014, the average market performance of

companies in the top-quartile of candor rankings outperformed the prices of bottom-ranked

companies, 29.8 percent and 12.3 percent respectively.

The average market performance of companies ranked high in candor in the 2013 Survey

exceeded the performance of companies that ranked high in F.O.G. by 1,750 basis points.


Chart 1 Average 12-Month Market Performance Top and Bottom-Ranked Quartiles versus S&P 500

Over this eight-year timeframe, the aggregate market price change of top-quartile companies was

110.5 percent vs. the aggregate market price changes of the bottom-quartile companies of 15.7

percent.

The average market price change of top-quartile companies over the eight-year period was 13.8

percent vs. the 2.0 percent average stock price change of the bottom quartile companies.

In comparison, the aggregate change in the S&P 500 Index over this eight-year period was 58.5

percent versus the 22 percent increase year-over-year from Q2 2013 to Q2 2014.

Why is this important? Candor is a proxy for trust. Executives who choose to obfuscate will be

handicapped in creating trust and engagement with stakeholders. Companies with trust-deficient

cultures will be more likely to report disappointing results. A significant lack of candor over time

can foster toxic cultures that will erode shareholder wealth.


2. The Rittenhouse Rankings Model of Corporate Culture and CandorTM

Financial analysts use the Rittenhouse Rankings model below to score content in executive

communications. This model is composed of six primary-colored systems and a grey triangle depicting

corporate candor. Each system is defined by important business topics.

Rittenhouse Rankings Corporate Culture and Candor Model ™

Seven Systems of Candor-Advantaged Business

Model Overview

The hub of the culture and candor model is Capital Stewardship. It includes topics such as cash

flow, goals, capital discipline, and operating metrics. Topics in each of the systems are defined by

scoring protocols, so analysts can systematically and objectively code communications to calculate

measures of positive and negative Candor.

The remaining six systems are organized into three vectors. The red vector or left brain system (1)

combines Strategy and Accountability systems. Strategy topics include business opportunities,

markets and competitive advantages. Accountability topics include, progress reports and financial

results. Strong Accountability disclosure reveals a CEO’s commitment to rigorously execute

corporate strategy and create a culture of ownership and responsibility.

The blue vector or right brain system (2) combines Vision and Leadership. Vision topics include the

corporate purpose and value proposition, as well as statements about innovations. Leadership

topics include commentary about investor skepticism, and what CEOs learned in addressing

problems and failures. Strong, credible leadership supports the realization of a credible and

compelling Vision.

The third vector or backbone of the system (3) combines Stakeholder Relationships and Candor.

Stakeholder relationships include topics about customer needs, employee programs and corporate

empathy. High candor scores is an indicator of stronger and more trusting stakeholder

relationships. Because it is difficult to see the presence of Candor, and easier to code and score for

the absence of candor, points are deducted for Candor topics such as business jargon, confusing

statements, clichés, and contradictory explanations.

All the other systems are awarded positive points for relevant commentary. Negative candor

topics, as a whole, reveal corporate F.O.G; a term for “fact-deficient, obfuscating, generalities.”

(1) (2)

(3)


Culture and Candor Survey Benchmark Diagnostics

Chart 2: Candor Allocation for Total Survey Companies

2013 Survey 129 Net Content pts | 301 F.O.G. pts

Content Allocation

2012 Survey 153 Net Content pts / 298 F.O.G. pts

Net Content scores (total positive points less negative candor points) fell from 154 points in 2012 to

129 points in the 2013 survey. F.O.G. points were relatively flat year-over-year.

CEO obfuscation continues to grow.

Because positive points declined, year over year, F.O.G. commentary increased from 66 percent to

70 percent. This means that the trustworthiness of commentary in the 2013 Culture and Candor

survey was discounted an average 70 percent, up from 66 percent in the 2012 survey.

2013 2012

6% 5%

9% 11%

3% 4%

4% 5%

3% 4%

5% 5%

70% 66%

F.O.G. 70%

F.O.G. 66%


Culture & Candor Survey Benchmark Diagnostics

Chart 3: Top-Quartile Candor Scores

2013 Survey 384 Net Content pts | 201 F.O.G. pts

Content Allocation

2012 Survey 390 Net Content pts / 184 F.O.G. pts

In 2013, top-quartile companies averaged 384 points of net content or total positive candor points.

This was higher than the amount of total information delivered by the 100 company Survey which

averaged 301 points.

As well, top-ranked quartile companies achieved a balanced distribution of content over the six Topic

areas: Strategy (17%), Vision (14%), Leadership (10%), Accountability and Capital Stewardship both

(9%), and commentary related to Stakeholder Relationships scoring 7% of total net content, while

F.O.G. accounted for only 34%.

2013 2012

14% 14%

17% 19%

9% 10%

10% 9%

7% 7%

9% 9%

34% 32%

F.O.G. 34%

F.O.G. 32%


3. Innovative Commentary in Top-ranked Shareholder Letters

Excerpts below from the top six-ranked companies in the 2013 Survey illustrate either a

unique way of looking at the world, or business or even about stakeholders that engages

readers and investors and made these shareholder letters stand out.

1. Charles Schwab reported on the year’s depressed earnings, the ongoing lack of consumer trust

for financial services companies – and how Schwab plans to turn these around.

In my letter last year, I made a few observations about the challenges we would likely face in 2012:

a bruising presidential election, ongoing sovereign debt problems in Europe, continued deleveraging

by consumers, and the Federal Reserve’s doubling down on their extraordinary efforts to anchor

interest rates at record low levels. These all came to pass, making the environment difficult for our

company and our clients.

For Schwab, this environment once again depressed earnings to a level below what we expect to

deliver to stockholders in a more normal environment. For investors, the continued uncertainty

prompted a move out of equities in search of yield and security. Similarly, trading was muted as

investors struggled to see any signs of confidence and conviction in the equity market. Perhaps the

most damaging aspect of 2012 was the ongoing lack of trust that consumers felt toward financial

services firms. According to a recent major survey, trust in financial services companies ranked

near the bottom among all industries.

For many competitors, this lack of trust is a building crisis. But at Charles Schwab, we see an enormous

opportunity. Our vision is clear: We want to be the most trusted leader in investment services.

2. Pitney Bowes reported on new cryptographic technology that provides customers with secure

systems, verifies the authenticity of sensitive documents and finds a balance between customers’

desire for personalized offers and privacy.

Our cryptographic technology is built into our e-commerce and pbSmartPostage™ offerings, and

our expertise in architecting secure systems was essential in the creation of the Volly™ digital

delivery service. Our technology also informs our new pbSecure™ evidencing platform for verifying

the authenticity of diplomas, employment records and other sensitive documents in business and

academia. Our scientists are also working on ways to couple our data security technologies with

our location intelligence applications to help marketers find the best way to balance their

customers’ desire for personalized offers with their concerns about privacy.

3. Southwest Airlines reported fuel conservation practices from lighter-weight, recyclable aircraft

interiors to replacing petroleum-fueled ground-servicing equipment with electric ones.

As fuel is our largest cost and our largest contributor to GHG emissions, our fuel conservation

initiatives are crucial. Our most recent conservation efforts have centered on modernization of our

fleet—including new, more efficient aircraft and the new lighter-weight, recyclable Evolve interior for

the majority of our existing aircraft. Related to this, we continue to increase the number of electric-

powered ground support equipment (GSE) to replace older, petroleum-powered GSE in our fleet.


4. General Mills continued its exemplary reporting of transparent and detailed financial results

that include market-to-market impacts of commodity positions and sales break downs from

acquisitions and the base business.

General Mills’ net sales grew 12 percent in fiscal 2012 to reach $16.7 billion. The international

Yoplait yogurt business that we acquired in July 2011 contributed 7 points of net sales growth, and

sales for our base business grew 5 percent. Segment operating profit increased 2 percent to

exceed $3 billion for the first time in company history. Profits grew at a slower rate than sales

primarily due to the higher input costs, the change in our business mix to include the Yoplait

acquisition, and an 8 percent increase in worldwide advertising and media investment supporting

our brands.

Diluted earnings per share (EPS) of $2.35 were below prior-year results primarily due to changes in

mark-to-market valuation of certain commodity positions in both years, as well as restructuring

charges recorded in the fourth quarter of fiscal 2012. Adjusted diluted EPS, which excludes

restructuring expense, mark-to-market effects, and certain other items affecting comparability of

results, totaled $2.56 in 2012 compared to $2.48 a year ago.

5. Costco focused on corporate culture and defined it as “the way we treat our members.” After

all, these people “pay for the right to shop” and “deserve full attention and respect.”

Member service has always been an area of emphasis for our employees. The way we treat our

members defines who we are – it is an essential part of our corporate culture: Take Care of Our

Members. When people pay for the right to shop, they expect and deserve our full attention and

respect – and we strive to do this with each and every member visit. In this vein, our employees are

Costco’s most important asset; and their attention to “member service” is one of our greatest

strengths.

6. Amazon responded to a company critic who described Amazon as “a charitable organization”

run by investors for the benefit of consumers. He justified the investments in new technologies and

products by invoking Ben Graham’s description of the market as a weighing, not a voting machine.

Our heavy investments in Prime, AWS, Kindle, digital media, and customer experience in general

strike some as too generous, shareholder indifferent, or even at odds with being a for-profit

company. “Amazon, as far as I can tell, is a charitable organization being run by elements of the

investment community for the benefit of consumers,” writes one outside observer. But I don’t think

so. To me, trying to dole out improvements in a just-in-time fashion would be too clever by half. It

would be risky in a world as fast-moving as the one we all live in. More fundamentally, I think long-

term thinking squares the circle. Proactively delighting customers earns trust, which earns more

business from those customers, even in new business arenas. Take a long-term view, and the

interests of customers and shareholders align.

As I write this, our recent stock performance has been positive, but we constantly remind ourselves

of an important point – as I frequently quote famed investor Benjamin Graham in our employee all-

hands meetings – “In the short run, the market is a voting machine but in the long run, it is a

weighing machine.” We don’t celebrate a 10% increase in the stock price like we celebrate

excellent customer experience. We aren’t 10% smarter when that happens and conversely aren’t

10% dumber when the stock goes the other way. We want to be weighed, and we’re always working

to build a heavier company.


4. In the 2013 Survey, fewer companies reported on cash flow than in 2012

Fewer companies reported on cash and cash flow in the 2013 Survey compared to the 2012 Survey,

66 companies vs. 70 respectively. This declining number reflects a similar pattern last observed in

the Surveys during the 2006-2007 pre-bubble market.

The following companies are the top scorers in reporting on cash and cash flow in the 2013 Culture

and Candor Survey. Select cash flow language examples are also presented.

Loews (select excerpts)

Loews ended 2012 with $3.9 billion in cash and investments at the holding

company. In the last few years we have used our cash to help our

subsidiaries make tuck-in acquisitions, to offer bridge financing to our

subsidiaries when conditions in the capital markets were not ideal, and to

buy back our own shares.

We are attracted to companies that have long-term staying power and can

thrive throughout a business cycle. We will consider both cyclical and non-

cyclical companies, as both can contribute meaningfully to shareholder

value if we capitalize and operate them prudently. We are drawn to

companies with undervalued assets and the ability to generate cash flows

over a business cycle for both internal reinvestment and the payment of

dividends.

Church & Dwight

Our annual adjusted free cash flow has increased by $327 million over the

past 10 years. This reflects excellent working capital management by our

financial and supply chain teams in managing our working capital and has

enabled us to achieve free cash flow conversion that leads the consumer

packaged goods industry. Over the next 3 years, we anticipate that we will

generate over $1.2 billion in free cash flow. This will enable us to

aggressively pursue acquisitions, make capital investments to continue to

support the profitable growth of our existing businesses, and return cash to

our shareholders. We have paid consecutive quarterly dividends since

1901.

IBM

Cash flow: IBM has consistently generated strong cash flow, a key indicator

of real business performance. In 2012 our free cash flow was $18.2 billion,

a record for IBM and $12 billion higher than a decade ago. We ended 2012

with $11.1 billion of cash and marketable securities.

Sherwin-Williams

Consistent investment relies on strong, dependable cash generation. In

2012, our net operating cash increased $152 million to $888 million, or

approximately 9.3 percent of net sales. After adding back the cash

settlement paid to the IRS in the first quarter of 2012, cash from operations

for the year approached 10 percent of net sales, a long-term objective for

the Company.

Company Pts.

1. Loews 72

2. Church & Dwight 69

3. IBM 57

4. Sherwin-Williams 51

5. Alcoa 42

6. Dow Chemical 39

7. Eastman Chemical 39

8. Ford Motor 36

9. General Motors 36

10. Costco 33

11. Lockheed Martin 33

12. Xerox 33

13. UPS 27

14. Cisco Systems 24

15. Entergy 24

16. Hewlett-Packard 24

17. Kellogg 24

18. Comcast 21

19. Emerson 21

20. Texas Instruments 21


6. Corporate F.O.G. increases after declining in the 2011 Survey.

In the 2013 Survey, F.O.G. decreased over 2012, however the overall total points for F.O.G.

increased and ranked the second highest in twelve years, signaling future market volatility.


Chart 4 Toxic and Benign F.O.G. Levels

Examples of F.O.G. from the 2013 Candor Survey

Citigroup

My team and I will continue to seek ways to refine and optimize the execution of our strategy and

improve operating efficiency. [Platitude] As a company, we need to show expense discipline [What is

this “expense discipline”?] and be what I like to call “maniacal allocators of our resources.” [Why

“maniacal”?] Success depends on investing our resources in the right places, in the right businesses,

at the right time. [Cliché] We can’t be everything to everyone. [States the obvious] Our business model

is simple and straightforward: to provide the best core banking products and services What are their

metrics for “the best core banking products and services”? to people and institutions through

leveraging our global footprint, which includes the world’s fastest-growing markets and cities. [Jargon]

ConAgra Foods

We reorganized our sales organization [What changed?], built and launched a customer development

organization [What does this customer development organization do?] and began new joint business

planning processes. [Joint with whom?] These moves are enabling us to transform our relationships with

customers by providing proactive, strategic solutions [Jargon].


7. Reporting on Leadership and Underperformance

In the 2013 Survey, 51 companies reported on underperformance – or “What Went Wrong” in the

2013 Survey down from the 72 companies reporting on this topic in the 2010 survey at the height of

the economic collapse. Contrary to what many investors believe, a majority (54 companies over the

past eight years), provided reports of operating or other kinds of problems in their shareholder letters.

Chart 5: Companies Reporting on What Went Wrong

Top 25 Companies

on What Went Wrong

Rank Company #pts.

1 Novartis 30

2 Exelon 25

3 General Mills 25

4 Citigroup 20

5 Entergy 20

6 FedEx 20

7 Loews 20

8 Sony 20

9 Tim Hortons 20

10 Whirlpool 20

11 Alcoa 15

12 BHP Billiton 15

13 ConocoPhillips 15

14 CSX 15

15 Dow Chemical 15

16 Kellogg 15

17 Pitney Bowes 15

18 Toyota 15

19 3M 10

20 ADP 10

21 Avon 10

22 CIBC 10

23 Eaton 10

24 Edison Intl. 10

25 Fiat 10

Exelon: Most difficult pricing environment since 1997

We are experiencing the most difficult pricing environment the company has faced

since market deregulation in 1997, and our stock price remains correlated to

natural gas prices as well as overall economic conditions. Exelon’s share price on

December 31, 2012, was $29.74, down 31 percent from (pre-merger) Exelon’s

2011 year-end share price of $43.37. Both natural gas and power prices are at or

near 10-year lows. 2012 day-ahead prices in the Electric Reliability Council of

Texas (ERCOT) market dropped 45 percent from 2011, and PJM West prices fell

more than 20 percent from the prior year. 2011-12 was the warmest winter on

record, and load growth for our utilities remained generally flat due to a slow

economic recovery. All of these forces negatively affected our stock price in 2012.


CANDOR RANKINGS METHODOLOGY

Rittenhouse Rankings has developed a proprietary analytic model that includes over 150 topics

typically found in CEO communications. These are organized into six categories: 1) Capital

Stewardship; 2) Strategy; 3) Accountability; 4) Vision; 5) Leadership; and 6) Stakeholder Relations.

Each topic within these categories is defined by a set of rules or protocols. Each topic is assigned

a number and scoring formula that weights its relevance in determining corporate success.

Our goal is to objectively analyze CEO words and context to produce reliable, relevant, and

comparable Candor Scores and Rankings. Letters to shareholders are an important measure of CEO

authenticity because CEOs sign their names to them. A shareholder letter will reveal how much a

CEO understands his business and can articulate how it makes money in order to increase intrinsic

value.

The Culture & Candor methodology can be applied to any corporate communication: MD&A

documents, earnings teleconference calls and shareholder letters. Selected documents are first

scanned and searched for relevant topical statements. Points are awarded for factual details and

context. In addition, documents are analyzed for statements that qualify as “F.O.G.”: Fact-deficient,

Obfuscating, Generalities.” These include platitudes, clichés, business jargon, confusing statements

that lack context and those indicating a loss of direction and focus. Points are deducted for these

examples.

The benchmark Rittenhouse Rankings Culture & Candor ScoreTM is derived by totaling all negative

(F.O.G.) points found in annual shareholder letters and dividing these points by all positive points to

calculate a F.O.G. percentage.

Sorting the relative measures of F.O.G. creates the 100-company rankings in the Rittenhouse Culture

& Candor SurveyTM. The companies that comprise the Rittenhouse Rankings Culture & Candor Survey

were selected in 2000 to create a representative sample of companies based on four business

characteristics: 1) capitalization, 2) financial performance; 3) Fortune 500 reputation; and 4)

industry representation.

All the companies in the sample are U.S.-based except for Siemens, Schlumberger, Novartis, CIBC,

Air Canada, FIAT, Toyota, L’Oreal, and BHP Billiton. Over the past 10 years, approximately 25 percent

of the original sample companies have been replaced due to acquisitions, privatizations, and failure

to publish shareholder letters. Two companies were dropped from the 2011 Culture and Candor

Survey: Rite Aid and Yahoo because they did not publish shareholder letters.

© 2015 rittenhouse rankings, inc

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