Audio: Use your microphone and speakers (VoIP) or call in using your telephone. Direct your questions to Staff via the Questions or Chat pane. To access this webinar audio via the internet, select Mic & Speakers under your Audio pane. Check that the audio on your computer is on and the volume is turned up. For technical assistance contact the Citrix webinar utility customer number: Presented by L.J. Rittenhouse, President Rittenhouse Rankings, author Investing Between the Lines (McGraw-Hill January 2013) Selected as one of the Top 100 Thought Leaders in Trustworthy Business Behavior, 2012, Trust Across America This material is the intellectual property of Leslie Rahl, and shall not be reproduced or used without the express written permission. Managing Risk by Decoding CEO Communications December 5th, 2012 – 12 p.m. U.S. Eastern Time

based on Investing Between the Lines (McGraw-Hill December 2012) © Rittenhouse Rankings, 2012

Business Risks Bank of America, 2011 Shareholder Letter … We have developed a clear understanding of our risk appetite across all businesses. This includes seven major categories: credit risk, market risk, operational risk, compliance risk, liquidity risk, strategic risk and reputational risk. What is Communication Risk? Excessive jargon, confusing and contradictory statements, platitudes, clichés and inauthentic leadership language. © Rittenhouse Rankings, 2012

Road To Disaster Rittenhouse Rankings History of Lehman Brothers

© Rittenhouse Rankings, 2012 How can we prevent future Enrons? Securities and Exchange Commission Financial Roundtable New York City, March 1, 2002 CEOs should write their own shareholder letters.

Berkshire Hathaway Owners Manual Principle #12 We will be candid in our reporting to you, emphasizing the pluses and minuses important in appraising business value. Our guideline is to tell you the business facts that we would want to know if our positions were reversed. We owe you no less… We also believe candor benefits us as managers: The CEO who misleads others in public may eventually mislead himself in private.

Clues to Decode CEO Communications Candid 1. Ability to make judgments free from discrimination or dishonesty. 2. The quality of being honest and straightforward in attitude and speech. Etymology: c.1637, from L., purity, openness, orig. whiteness, from candere to shine, illuminate. Transparent 1. Free of deceit. 2. Easily seen through or understood (because of a lack of subtlety); "a transparent lie". Etymology: French expression, from late Latin transparens - entis…Latin trans across, through, parere to appear. F.O.G. 1. Fact-deficient 2. Obfuscating 3. Generalities Absence of candor © Rittenhouse Rankings, 2012

First Polling Question Is it possible to measure the presence and absence of corporate candor? Yes No Possible, but I would not trust it. No opinion © Rittenhouse Rankings, 2012

Positive Candor Points Cash Flow - Words and Context Johnson & Johnson 2001 Shareholder letter, CEO Ralph Larsen __________________________________ Yet another measure of financial performance which we have focused on is [1] cash flow from operations. [2] Free cash flow [3] (defined as cash remaining after making the capital expenditures required to support the growth of our business) is, in fact, [4] one of the very best measures of how a company is performing. [5] Its virtue is its clarity. [6] You either generate cash or you dont. [7] It is not subject to many varying interpretations or accounting changes. (7 Cash Flow references) x (3 points) = (21 candor points) © Rittenhouse Rankings, 2012

Negative Candor Points Clichés, Hyperbole, Jargon and Orwellian Nonsense Enron 2000 Shareholder letter Our talented people, global presence, financial strength and massive market knowledge have created our sustainable and unique businesses. EnronOnline will accelerate their growth. We plan to leverage all of these competitive advantages to create significant value for our shareholders. Total 28 points of F.O.G. Clichés 3 Clichés= -9pts © Rittenhouse Rankings, 2012 Hyperbole -3 Jargon -5 Orwellian -5 Clichés -6

Business Domains: + and - Points Number of Points Business Domains J&J 2001 Home Depot 1999 Home Depot 2000 Capital Stewardship Strategy Accountability Vision Leadership Stakeholder Relationships FOG SCORE TOTALS 463 pts 559 pts 130 pts © Rittenhouse Rankings, 2012 Mastery of these seven business domains is key to running a successful and sustainable business.

New Candor and CEO Consciousness Home Depot CEO, Founder ARTHUR BLANK New Home Depot CEO BOB NARDELLI Ranked 14 th in Culture and Candor Survey Only 17% FOG Well-balanced Ranked 41 st in Culture and Candor Survey 71% FOG Imbalanced © Rittenhouse Rankings, 2012 Home Depot 1999 Home Depot 2000 Content Allocation in Home Depots 1999 and 2000 Shareholder Letters Net content points (pie size)

Culture and Candor Survey Rankings Rank companies based on descending Candor scores (% of FOG) Criteria to construct a representative sample: Industry Representation Market Capitalization Financial Performance Reputation (admired by Fortune) Representative sample allows benchmarking and study of candor and market trends for individual companies and the survey group. FINDING: ? © Rittenhouse Rankings, 2012

Second Polling Question Would you expect Candor rankings to reflect market performance? Yes No Not reliable No opinion © Rittenhouse Rankings, 2012

© 2012 Rittenhouse Rankings Inc.Investing Between the Lines Market Performance and Candor Rankings © Rittenhouse Rankings, 2012 AMZN Culture and Candor Rankings

© 2012 Rittenhouse Rankings Inc.Investing Between the Lines Candor S&P 500 HPQ Survey Year 1/ /2011 Market Performance and Candor Rankings © Rittenhouse Rankings, 2012 Carly Fiorina Interim CEO Robert Wayman Mark Hurd Léo Apotheker Meg Whitman

Benmosche Greenberg Sustainability and Candor Rankings © Rittenhouse Rankings, 2012 Financial Services Companies Rittenhouse Rankings Culture & Candor Rankings Rittenhouse Rankings Culture & Candor Survey Year

Top Decile Ranked Companies Rittenhouse Rankings Culture and Candor Surveys © Rittenhouse Rankings, 2012 * Founder cultures Rank Top-Ranked Companies 2011 Rank Top-Ranked Companies Church & Dwight 1 Sherwin-Williams 2 Alcoa 2 Honeywell 3 Southwest Airlines* 3 Costco 4 Google* 4 DuPont 5 Ford Motor* 5 Ford Motor 6 Starbucks* 6 Loews 7 Jet Blue* 7 Netflix 8 Travelers 8 General Mills 9 Home Depot 9 Amazon.com 10 Costco* 10 Xerox

Seven Year Average Returns of Top and Bottom Quartile Companies Ranked by Candor © Rittenhouse Rankings, 2012 *12 Months from 6/30 Q2 to 6/30 Q2 X

Third Polling Question How important is candor and corporate culture in mitigating business risks? Extremely important Important Neutral No opinion © Rittenhouse Rankings, 2012

Accountability Cultures Bank of America, 2011 Shareholder Letter … We have developed a clear understanding of our risk appetite across all businesses. This includes seven major categories: credit risk, market risk, operational risk, compliance risk, liquidity risk, strategic risk and reputational risk. … Finally, we are clear about accountability all employees understand their obligation to speak up if they have a concern, and it is part of our culture to encourage it. © Rittenhouse Rankings, 2012 Internalized Risk Management and Performance

Candor Trumps Fear © Rittenhouse Rankings, 2012 Leadership Language & Risk Management Parker Palmer, Educator, Author, Healing the Heart of Democracy … I know from my experience inside corporations and large-scale organizations that everybody is busy sizing up the leader and asking, Is this a divided person or a person of integrity? Is what we see what we get? When the answer is, No then everything starts to fall apart. Thats because I have just described an unsafe situation: when leaders with the power to call the tune are perceived as lacking congruence or integrity, they create unsafe situations. And what do people do in unsafe situations? They start hiding out. They start faking it. They start giving less than what they have to give. An organization simply cannot function at anywhere near full effectiveness when that kind of thing is going on. And there is a lot of that going on.

Candor Crisis © Rittenhouse Rankings, 2012 Implementation of Sarbanes-Oxley Buffett proven correct: Greatest increase in FOG occurred during the passage and implementation of Sarbanes-Oxley.

Increase in Toxic FOG: Orwellian Usage If liberty means anything at all, it means the right to tell people what they do not want to hear. If thought corrupts language, language can also corrupt thought. Political language... is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind. © Rittenhouse Rankings, 2012

WorldCom scandal one of many. – CNNMoney Is there anything Enron didnt do? – Fortune Magazine MF Global missing cash mostly accounted for. – AP AIG: What Went Wrong? - BusinessWeek Government allowing Lehman collapse still mysterious two years later. – PBS Newshour Living in an Age of Mistrust News Corp and the Phone Hacking Scandal. - Reuters Victims sought in Countrywide Case. – WSJ.com © Rittenhouse Rankings, 2012

How to Build Risk-mitigating, Candid Cultures Recognize Communication Risk Read Investing Between the Lines; learn the clues to analyze executive candor and discover the best practices of High Candor Performers. Sponsor in-house workshops Thank you for inspiring the team last weekyour session on candor enabled the team to go far, resulting in progress many suspected was unachievable at the start of the day. Include Candor discussions in Industry Forums © Rittenhouse Rankings, 2012

RittenhouseRankings.com New York, New York (212) Questions? © Rittenhouse Rankings, 2012