Misdirection is the goal in magic, but probably not in regulatory disclosures. Here is a pretty fascinating article from Advisory Board member Dan Goelzer:
“A research paper published in the Journal of Business Ethics finds that companies that use ‘trust words,’ such as ‘character,’ ‘ethics,’ and ‘honest,’ in their MD&A ‘have lower information content’ in their earnings announcements than firms that do not use trust words. In Can We Trust the Trust Words in 10‑Ks? (full article must be purchased), the authors also report that ‘firms using trust words are more likely to receive a comment letter from the SEC, pay higher audit fees, and have lower corporate social responsibility scores.’ In short, the use of trust words in the 10-K is ‘associated with negative outcomes, and trust words are an inverse measure of trust.’ In reviewing MD&A and other company disclosures, audit committees may want to be alert to these words and consider whether they describe tangible corporate policies or are simply an attempt to create a favorable impression untethered to reality…
The overall conclusion of the paper is that ‘firms using trust words tend to invite more scrutiny from investors, the SEC, auditors, and others. Thus, the use of trust words seems to reflect the opposite of a firm’s culture of trust * * *.'”
Hmmm – anyone feel like there are lessons here for ESG/sustainability reports? Yeah, me too.
ESG leaders, staff and advisors: take a hard look at the language used in ESG/sustainability disclosures. Are you overcompensating or using misdirection (inadvertently or otherwise) with your wording? Reconsider your use (overuse??) of “trust words” in favor of objective, honest and plain wording. Think Hemingway, not Faulkner. I recently talked with Christine Uri (members can listen to the podcast here), who advocates for something she calls “Minimum Viable Reporting.” I’ve long held that such an approach is beneficial, too.
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