Bull has an aroma, and it's not exactly Chanel No. 5

I usually don't give a rip about annual reports. When they arrive in the mail, I spend a grand total of 30 seconds flipping through them, evaluating the design, skimming the letter, and tossing them.

But since we started the crusade against business idiocy, I've developed a mild obsession with them.

In writing the book, we looked at recent annual reports from two types of companies – highly respected and admired companies, and companies recently investigated for scandal. We analyzed the CEO letters using Dr. Rudolph Flesch’s Reading Ease scale, the most widely used language assessment tool in existence.

(The Flesch scale uses a complex formula, but all you need to know is that Sports Illustrated gets a score of 63, while the IRS tax code comes in at an unsurprising -6.)

What we found was striking: CEO’s from admired companies used clear, understandable language. But CEO’s from scandal-plagued companies used obscure, indecipherable language.

Take Richard Scrushy’s most recent (2003) letter to HealthSouth shareholders. The language he (or his handlers) chose for this important annual missive was evasive and full of bull:

HealthSouth is dedicated to creating innovative physician relationships that will provide increased financial power to drive geographic expansion, enhance prestige and expand the services available…

This passage, and others like it (and there are many), are the empty calories of business communication. They sound like something good might be happening, but a careful read reveals nothing whatsoever about what’s really going on.

There are a few reasons a CEO might be this obtuse: either he doesn’t know the business, or he’s got something to hide. Neither is good for a shareholder.

Enron's 2000 letter to shareholders is another great example. It was full of hype and bombast, and everyone knows what happened next.

Compare Scrushy & Skilling's fluff to the straightforward language used by Jeff Bezos in his 2002 letter to shareholders:

In many ways, Amazon.com is not a normal store. We have deep selection that is unconstrained by shelf space. We turn our inventory 19 times in a year. We personalize the store for each and every customer. We trade real estate for technology (which gets cheaper and more capable every year). We display customer reviews critical of our products. You can make a purchase with a few seconds and one click. We put used products next to new ones so you can choose.

Any doubt what business he’s in, or where Bezos is taking the company? He provides a laundry list of concrete things they're doing to make the customer experience better.

Warren Buffett is another beacon of clarity: contrast his candid letters with some of the hype-filled ones put out by the more corrupt companies.

An investor reading these letters has a choice: invest with someone who is clear, straightforward and puts his customers first, or choose a company that is obscure, evasive and puts Wall Street analysts first.

This doesn’t mean everyone with a low Flesch Score should be prosecuted, any more than it means that a straight talking CEO is a sure bet to produce outsized shareholder gains. But investing is a game of probabilities, and it seems the aroma of bull is a stinking good reason to stack your chips somewhere that is bull-free.