Why CEOs set the right example when they speak the awful truth.

Twitter CEO shows honesty is admired, yet costly

Jamie Dimon was slammed for using profanity on an analyst call earlier this year (an admission that occasionally JPMorgan steps in “dogs—t” when it comes to legal issues, to be exact). Netflix’s CEO Reed Hastings has raised hackles by referring to HBO as his company’s “b--ch” on earnings calls.

But Jack Dorsey, the 38-year-old founder and interim chief executive of Twitter Inc., did something much more disconcerting this week: He told analysts on a conference call the truth.

“We haven’t done a great job at aligning the entire company around our total audience strategy,” he said on Tuesday.

His company’s chief financial officer, Anthony Noto, also told analysts they shouldn’t expect much growth in Twitter’s audience for a “considerable” amount of time.

After the call the company’s stock dropped 15 per cent. So was it smart for Dorsey to offer up quite so much straight talk?

One analyst on the call, Rob Sanderson, who covers Internet stocks at MKM Partners, an institutional equity research firm based in Stamford, Conn., believes it is always a good idea for CEOs to tell the truth, even if it hurts their share price.

“Twitter expects tepid growth in active users. You can’t hide from it,” Sanderson said. “You can’t sweep things under the rug — not if you expect to have any credibility with the investment community.”

And such bluntness is not unheard of, at least in Silicon Valley. Elon Musk, the Canadian-American business magnate who founded Tesla and Space X, was brutally frank last year when he said “I think our stock price is kind of high right now, to be totally honest.”

Even so, company executives and their communications gurus typically spend a lot of time worrying about what they will say, and how they will come across, on quarterly earnings calls.

Dorsey, who stepped down as CEO in 2008, returned to the top job on an interim basis just this month. So perhaps he was less prepared for his call on Tuesday.

Whether it was planned or off-the-cuff, though, Hugh Arnold, a professor of organizational behaviour and leadership at University of Toronto’s Rotman School of Management who counsels companies like Bank of Montreal on how to speak to the public and internally, isn’t sure Dorsey needed to be quite so blunt.

He agrees that CEO candour is always important for internal communications. And that it’s desirable when answering direct questions on analyst calls. “Nothing will pull you down quicker than if the analysts have the impression that you are trying to hold something back,” he said.

But rolling out “every bit of dirty laundry” is another matter. “It’s a different thing for a CEO to muse about where we are not doing so well, with an external audience,” he said. “You may be dissatisfied, but you may be miles ahead of

Why draw unnecessary attention to things?

all your competitors. Why draw unnecessary attention to things that are not exactly where you want them to be?”

David Larcker is a professor at Stamford University in Connecticut who has studied thousands of conference calls. His team compared the executives’ remarks with which companies later restated their earnings.

“When CEOs say, ‘ As you know,’ or ‘everybody knows,’ or ‘It should be clear to everybody,’ or speak in generalizations, it’s a bad sign,” Larcker said. The correct approach, he says, is, “you agree there is a problem, talk in specifics as opposed to generalizations.”

Dorsey in his remarks used the pronoun, “I,” quite frequently, which, Larcker said, is a good sign. And who can say how the market would have reacted if he had been less candid? “It might have dropped 20 per cent if he hadn’t taken ownership,” Larcker says.

Shares in Twitter Inc. closed at US$31.24, a drop of 14. 5 per cent over the previous day’s close. Twitter has also yet to turn a profit. It posted a loss of US$136.7 million, or 21 cents a share.

One thing did please investors. Dorsey showed up a month ago on CNBC with a full mountain beard; his beard was carefully trimmed for the conference call.