CEOs Fail Candor Test

If you read books about corporate governance, you may be familiar with Laura Rittenhouse, author of Do Business With People You Can Trust: Balancing Profits and Principles. Rittenhouse recently reported the results of her fifth annual Rittenhouse Rankings Survey, noting that, "For the fifth consecutive year, we've found a positive correlation between companies that rank high in our CEO communication survey and superior stock price performance." Her firm also noted that, "Top-ranked companies in the survey increased their share prices over a two-year period by 21.5%, while bottom-ranked companies saw only a 7.3% increase." The top firms also beat the S&P 500 Index Fund (recommended in Fooldom) over previous one- and two-year periods.

What exactly is Rittenhouse looking for when she evaluates CEOs via their annual letters to shareholders? Candor. Specifically, she expects the chief executives to include diluted earnings per share (EPS) numbers for prior and current years, match these EPS numbers to those in the income statements, explain the difference between GAAP and non-GAAP EPS, and clearly explain significant year-over-year variances in EPS. (Read Bill Mann's explanation of GAAP.)

In the 2003 Rittenhouse Rankings survey, a whopping 87% of the CEOs failed to meet all of Rittenhouse's standards. Still, there were some standout firms. She has long pointed out BerkshireHathaway's (NYSE: BRK.A) (NYSE: BRK.B) Warren Buffett as an example of an extremely candid CEO who is painstakingly clear and informative in his communications to shareholders.

Here are some other firms that fared well:

• Alltel (NYSE: AT), which has been featured in our dividend-oriented newsletter, Motley Fool Income Investor
• Cisco Systems (Nasdaq: CSCO), which was recently evaluated by Ben McClure
• Estee Lauder (NYSE: EL), which recently lost its namesake and founder
• General Mills (NYSE: GIS), which makes my favorite cereal, Lucky Charms
• Wells Fargo (NYSE: WFC), which recently reported record earnings
• Knight Ridder (NYSE: KRI), which had a slow news day earlier in the year
• JetBlue Airways (Nasdaq: JBLU), which was featured in our Motley Fool Stock Advisor newsletter

Motley Fool recommends evaluating the integrity of a company's management team before investing in that firm. But that's easier said than done. Just ask Rittenhouse, who has read several years' worth of annual letters to shareholders just to get a sense of management's character.

Longtime Fool contributor Selena Maranjian owns shares of Berkshire Hathaway and several boxes of Lucky Charms.