business letter stamped with "F" type illustration of shareholder letter vocabulary words
Sarina Finkelstein (photo illustration)—Getty Images (1)

This Is What Companies Say When They Want to Downplay Their Failures

Jan 04, 2016

Publicly traded companies have to report on their financial performance—good, bad, or ugly. Shareholders have a right to know not just when a company is going gangbusters, but also when it's swimming in red ink.

In theory, the way they report positive and negative performance should be the same, right? They're working with facts, and numbers don't lie. But as it turns out, there are some grammatical and linguistic sleights of hand companies tend to use when they really, really hope you don't notice that they're hemorrhaging money.

Robert Poole, a visiting assistant professor in the English department at Texas A&M University, looked at the shareholder letters two big banks issued in the years 2008-2010 —in other words, during and shortly after the recession. "These letters do much more than simply introduce the annual reports which typically follow," he said.

Poole did keyword searches on the documents to tally up what kind of words the companies relied on in good times and in bad.

The differences are striking.

When they had to deliver bad news, banks embraced the passive voice, which Poole said helps create distance between the company and its mistakes. "External agents and realities become more central to the message in years of poor performance," Poole wrote in his paper, published in the new issue of the International Journal of Business Communication.

When their performance was strong, though, companies highlighted executives and team leaders, often by name, and referenced their specific work. "The acceptance of praise for high performance was indicated through the letters’ deployment of names and pronouns," Poole wrote. This kind of specificity and calling-out of leadership vanished when the banks Poole studied were having a bad year.

In bad years, they used words like "build," "serve," and "innovation" a lot more, as well as future-tense verbs. "Using the future tense takes the reader's attention away from past actions and decisions that may have produced negative outcomes," Poole pointed out. By contrast, shareholder letters in good years were full of the word "we've," which shows up in verb constructions where companies can highlight their previous business success without focusing as much on the future.

These might all sound like small differences, but if you plan to invest in a company, Poole said it's important to pay attention to these kinds of nuances. "For the average investor, I believe that awareness of these rhetorical strategies and the effects they aim to produce is of great value," he said.

If you're curious about a company, print out the letter, highlight the verbs, and see what kinds of words turn up often. "Match the verbs to the agents, and quickly you can see who is doing what," he said. "If you can't find many people doing things, I would suggest thinking very carefully about why that is the case.​" In all likelihood, it's an attempt to downplay and subtly distract you from a less-than-stellar showing.

All products and services featured are based solely on editorial selection. MONEY may receive compensation for some links to products and services on this website.

Quotes delayed at least 15 minutes. Market data provided by Interactive Data. ETF and Mutual Fund data provided by Morningstar, Inc. Dow Jones Terms & Conditions: http://www.djindexes.com/mdsidx/html/tandc/indexestandcs.html. S&P Index data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Terms & Conditions. Powered and implemented by Interactive Data Managed Solutions