Does leadership matter?
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Of course, it should. In the long run, a culture centered on client service and financial accountability will produce higher financial returns; by contrast, a culture with outsized rewards for managers who treat the firm like a personal piggy bank creates lower returns. But how do we measure leadership? One way is by reading the company’s annual report, especially the CEO’s letter to shareholders. This document is an unstructured, free-flowing description of what the chief thinks is most important. There are no SEC-mandated boilerplate or caveats. By examining what is said and not said, we an inside look at management’s thinking.
Sometimes, the results are contradictory. For example, in Enron’s 2000 shareholder letter, the CEO claimed that net income reached $1.3 billion. But their income statement only showed $979 million in profit. The difference is in a footnote. The CEO chose to ignore an investment write-down in his text, an indicator of his attitude about accounting. By contrast, Berkshire Hathaway’s shareholder letter frequently describes – often in painful detail – management’s worst investment mistakes that year. Their belief is that honesty benefits all of us, managers and shareholders alike.
It’s hard to quantify candor, but by studying the CEO’s annual letter for three things—operating performance, leadership, and accountability to customers, communities, employees, and investors, we can see whether management is interested leading or just receiving a paycheck. If you don’t see open and honest communication in these areas, watch out. A fish rots from the head down. Our words reveal our character, and character is destiny.
It takes guts, sometimes, to address these issues, especially when things aren’t going well. But life without moral strength is just a long sleep. And sleeping companies are rarely profitable companies.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”