Not what bosses say but how they say it that counts


CEOs whose companies miss earnings targets give the game away with the words they use, writes PROINSIAS O'MAHONY

PROMINENT CHIEF executives, particularly in the financial sector, have told more than a few porkies over the last few years. Detecting dodgy behaviour needn’t mean sweating over the minutiae in company accounts, however – according to a new study, guilty chief executives give the game away in the language they use during stressful conference calls.

In Detecting Deceptive Discussions in Conference Calls by David Larcker and Anastasia Zakolyukina, of Stanford Graduate School of Business, the researchers looked at almost 30,000 company earnings transcripts between 2003 and 2007. They found that chief executives of companies which later restated the firm’s earnings used language in a different manner to their corporate brethren. They liked to use third-person plural and impersonal pronouns. Whereas straight talkers frequently used “I”, “me” and “mine”, deceptive executives preferred to talk of “the team” and “the company”, peppering their speech with “they” and “their” references. They were wont to express extreme positivity, opting for words such as “fantastic” and “great” instead of more banal adjectives. Negative words such as “adverse” and “awful” were avoided, as were words related to shareholder value.

References to general knowledge – “you know”, “everybody well knows” – were commonplace. Unscrupulous chief executives used fewer hesitations than was normal, a likely consequence of “having more prepared answers or answering planted questions”.

Chief financial officers were harder to read than chief executives, not speaking nearly as much as chief executives during analyst conference calls and opting for more guarded language. Interestingly, despite their reputation for unrealistic figures as the global financial crisis gathered pace in 2008, top executives at financial firms proved to be slightly more honest than those in other industries, according to the researchers.

This isn’t the first such study. “It is not what you say that matters but the manner in which you say it,” William Carlos Williams once said; “There lies the secret of the ages.” That message was borne out in a 2009 study that examined whether vocal cues could predict a firm’s future profitability.

Using new technology that detects minute and involuntary changes in speech waves, it found that executives whose voices betrayed a high level of negative emotions had good reason to be apprehensive. The companies they fronted went on to miss their earnings target in 38 per cent of cases, compared to a 27 per cent miss rate for companies where the chief executive appeared more relaxed.

Further research is likely to prove fruitful, the researchers conclude. Vocal cues provided by Federal Reserve chairman Ben Bernanke might assist in forecasting interest rates, they say, while exploration of executives’ facial expressions should also yield results.

Such techniques are already being employed by Business Intelligence Advisers, a Boston firm staffed by a number of ex-CIA operatives that conducts behavioural analyses of top executives.

Over the last decade, it claims to have analysed more than 50,000 question-and-answer exchanges, more than 4,000 earnings calls, across more than 1,500 companies in 30-plus countries, using its “tactical behaviour assessment model”. Their clients reportedly include Goldman Sachs and some of the world’s top hedge funds.

The firm looks for management replies padded with extremely detailed but irrelevant information, and examines all kinds of verbal and nonverbal behaviour.

Ironically, “candidly”, “honestly” and “to tell the truth” are words that should strike fear into the investor’s heart. It seems that chief executives could spare themselves a lot of aggravation if they took a more honest approach. One study involved a simulation where a group of investors was presented with a fictional firm’s restatement of earnings.

When the chief executive in question accepted full responsibility for the error, investor confidence increased and larger investments were made. When the chief blamed the revision on an industry-wide error, however, smaller investments were made.

Honesty, then, is the best policy. Investors prefer a straight forward “mea culpa” to self-justification. That’s a lesson uneasy chief executives – and politicians, one might add – might do well to learn.