Fostering Stakeholder Trust: Plain Language In Corporate Disclosure

Most of us know instinctively that using plain language is a good idea. “Please give me the most convoluted proxy statement possible,” said no investor, ever. But if you need some confirming data, read on.

A recent study by Labrador and BVA Group, a research and consulting firm, shows there are distinct benefits to presenting typical corporate disclosures in plain language. The study, “The Effectiveness of Plain Language Proven by Data,” found that when plain language is used, people can absorb information faster, are more likely to understand and remember what they read and view documents more favorably. Companies that produce those documents generate a valuable asset: trust.

Trust is always important. But in these uncertain times, when boards are making unpopular decisions in the short term to fortify their companies for the future, trust is crucial.

Objective Benefits of Plain Language

The Labrador/BVA study first analyzed efficiency. The study included eight text samples that were roughly 100 words each. Half were written in typical corporate-speak and half were rewritten in plain language. Only 40 percent of the study participants were able to grasp the “original” paragraphs in 30 seconds or less, compared with 60 percent who read through the rewritten paragraphs in the same time frame.

The increase in perceived clarity—the study’s second focus—was almost as striking. Participants who read “original” paragraphs said they understood the samples 49 percent of the time. Comprehension rose to 68 percent for rewritten paragraphs, even though participants might have been reading those samples more quickly. Reinforcing this finding, 72 percent of the study participants described the plain language samples as “clear.”

The third objective feature tested was retention. Does it matter if investors can quickly read and understand your disclosures if they don’t remember critical information when voting or deciding to invest new funds? Study participants retained information from the rewritten paragraphs 58 percent of the time, compared to 41 percent of the time for “original” paragraphs. Furthermore, more than half of the study participants specifically did not remember the content from “original” paragraphs.

Subjective Benefits of Plain Language

Plain language delivers the advantages of efficiency, clarity and retention by making documents more inviting and easier to read and understand. In this study, participants found plain language samples “well-written” 64 percent of the time, and “well-organized” 66 percent of the time (compared to 48 percent and 49 percent for the original copy). As a result, participants were far more likely to call the plain language samples “pleasant” to read (58 percent) than they were to say favorable things about the original samples (41 percent).

These results are significant because a reader’s positive impressions of a document can translate into positive feelings about the company behind the document. Several academic studies support that view. One recent study (The Impact of Readability of Corporate Social Responsibility Information on Credibility as Perceived by Generalist Versus Specialist Readers) addressed this point head-on, finding that plain language disclosure is perceived as more truthful and therefore more credible—especially among readers who are not specialists. If your company has a significant retail shareholder base, plain language is an excellent tool to enhance your credibility in shareholders’ eyes.

Other research confirms the link between plain language and trust by looking at narrower questions. For example, the study “Does Concrete Language in Disclosures Increase Willingness to Invest?” showed that disclosure using “concrete” words—a pillar of plain language—creates a domino effect. Concrete language helps readers visualize what the company does; the ability to visualize makes readers more confident in their evaluation of the company; and confidence makes readers more willing to invest. Another study titled “Annual Report Readability and Trade Credit” came to a similar conclusion regarding trade partners. Briefly, when trade partners review a “readable” annual report, it helps them understand the issuing company’s operations, and they are more likely to extend trade credit.

Finally, if you want your disclosures to be viewed as the primary trusted source of information about your company, the study “Disclosure Readability and the Sensitivity of Investors’ Valuation Judgments to Outside Information” indicates plain language will help. In this case, investors who read disclosures in typical corporate-speak were less comfortable evaluating the issuing company than investors who received the same information in plain language. To alleviate their discomfort, the investors who read the corporate-speak were more likely to turn to other sources, like news articles and analyst reports. That means companies issuing complex, jargon-filled documents rather than plain language versions may be squandering an opportunity to focus investors’ attention where they want it.

The Bottom Line

If your goal is for investors (and regulators, media, proxy advisors and trade partners) to be favorably inclined toward your company, you can boost your chances by communicating in plain language. People are more likely to read, understand, believe and remember your disclosure, and are more likely to come away with a positive impression—even trust.