What do Netflix, Radiohead, and The University of Michigan Health System have in common? They have made a concerted effort to incorporate (and communicate) trust into their employee and customer practices. At Netflix, employees take whatever vacation they feel they need, while the band Radiohead released a recent album online, trusting fans to decide how much to pay. The result for Radiohead? Greater revenue generation than all its previous releases. For their part, The University of Michigan Health System has also taken the “radical” step of encouraging doctors to apologize when they make mistakes. UM is trusting its patients to forgive them – thus risking legal liability – but indeed the number of malpractice suits has dwindled. Other providers are now including similar approaches.
In a time when trust in corporations, and at some level trust in anything “big” is at a low, companies need to think much harder about how they can increase their own credibility via transparency in their communications with investors. There are many ways to do this, but one of the very simplest involves communicating to investors in a more audience centered manner.
In a study by Feng Li, an associate professor of accounting at the University of Michigan’s Stephen M. Ross School of Business, Dr. Li found that in the 55,000 annual reports examined, the average Fog Index for these annual reports was 19.4 (a score of 12-14 is ideal and higher than 18 is unreadable), while the annual report readability score on the Kincaid Index was 15.2 – about twice as high as the optimal score of 7-8. Quite simply, the annual reports of many companies in this study were found to be completely unreadable, or at a minimum very difficult to read.
From research in the area of credibility and language, we know that clarity of communication is viewed as more trustworthy than unclear language. Not surprisingly, Mr. Buffet and Co. seem to understand this – just look at Berkshire Hathaway’s (Warren Buffet) recap of their 2008 successes where he focuses his explanations to the audience. Buffet even goes so far as to explain what a “float” is in everyday language.
“Our $58.8 billion of insurance “float” – money that doesn’t belong to us but that we hold and invest for our own benefit – cost us less than zero. In fact, we were paid $2.8 billion to hold our float during 2008. Charlie (Munger) and I find this enjoyable.”
For corporations who wish to take easy and small steps down the road toward more credible investor communication, clarity in spoken and written communication is a doable start.
Bob