GO
Loading...

Is that company lying? Five red flags to watch for

Kick Images | Photodisc | Getty Images

In business, numbers matter. But so does intuition. Is this sales pitch honest? Is this earnings call as good as it sounds, or is it just lipstick smeared on a pig? Good business leaders make sensible judgments about data. The great ones make sensible judgments about character — whether it's a new hire or a new business partner or this quarter's earnings recap.

Stanford University explored this dynamic in a study. Surveying thousands of earnings-call transcripts, researchers found that language patterns were better predictors of negative financial surprises than traditional accounting. Strong patterns emerged throughout the calls. CEOs who tried to deceive used inflated language, distanced themselves from performance by using "the company" or "the team" rather than "I" or "we," and peppered remarks with qualifying language. Put plainly, Stanford found that style beats substance.

So, as you're trying to parse everything from the White House's response to the disastrous Obamacare launch to Twitter's communication with investors about revenue growth, here are five red flags that will help you separate the lipstick from the pig:

Red Flag No. 1: Swearing to God, then over-emphasizing truthfulness, questioning the question

Liars overemphasize truthfulness and invoke religious imagery. Language like "I swear to god on my mother's grave we did not know our price cuts were going to coincide with the competition's" is full of warning signs. Sometimes, a person might buy time by questioning the question, like Bill Clinton asking the definition of "is."

Enron's fall from grace is a choice example of this dynamic. Take former CEO Jeff Skilling. In cringe-worthy testimony, Skilling offers a defense ripe with false certainty: "on the day I left I absolutely unequivocally thought the company was in good shape." (Click here to watch the video.)

Red Flag No. 2: The Three D's: Dodging, ducking, and deflecting

Liars dodge questions that could pin them down. Sometimes they refuse to answer all together. (Politicians and CEOs do this all the time.) It's like a policeman asking if you've been drinking, and you responding with the starting lineup for the Milwaukee Brewers.

Red Flag No. 3: It's no big deal

"Minimizing language" is a method of distorting truth by downplaying significant problems. It's like saying Katrina was a summer storm or the Hindenburg was a popped balloon.

Even the best CEOs are prone to using it. Take Steve Jobs. His tenure at Apple was dazzling. But there were bumps in the road too. "Antenna-gate" erupted after the iPhone 4's release, when users noticed lost signals when their hands blocked the iPhone's cellular antenna. Even though the iPhone 4 release was a major black eye for the company, forcing Apple to ship free cases to millions of customers, Jobs' response was classic employment of minimizing language: "It's not a big issue" was his response in this email that surfaced. (Apple: Don't hold it like that, Gizmodo, June 24, 2010)

Red Flag No. 4: Beefing up the point, rambling on

Shakespeare said that "brevity is the soul of wit." It's the soul of truth, too. Liars use bolstering and qualifying language to disguise their fibs, where honest people get to the point. The signs are easy to spot: "to tell you the truth," "in all honesty," "as far as I know." Anything that convolutes the point or emphasizes truth is suspect.

This happens in the business world and especially the sales world. Ever see an infomercial? There's a reason a 30-second spot on "Dancing with the Stars" won't sell a Ronco Rotisserie. The more they talk, the more they inflate their language; the more likely you are to buy their product. (To see how they really work, and for added amusement value, click here to watch Ellen De Generes demonstrating some of the best-hyped products on the market.)

Red Flag No. 5: It takes a village to take the blame

There's no "I" in "team." Stanford found that CEOs would distance themselves from poor earnings or performance by replacing an "I" or "we" with "the company" or "the team." There's a calculation there. Fibbers will often times — and unintentionally — create a gap between lie and liar.

— By Pamela Meyer

— Pamela Meyer is the author of the book, "Liespotting." Her TED talk , "How to Spot a Liar" is a favorite among CEOs. She speaks frequently on the subject of deception detection and is CEO of deception-detection training company, Calibrate. Follow her on Twitter @Pamela_Meyer.

Symbol
Price
 
Change
%Change
ADBE
---
AAPL
---

Featured

Contact Business

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More