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Governance Highlights from Warren Buffet's Letter to Shareholders

Editorial Team
Last Updated: 23-07-2021 1:30 PM

Every year Warren Buffet writes a letter to Berkshire shareholders highlighting key performance developments. This letter draws the attention of analyst and fund managers. As I was reading this letter  I noted key issues that were highlighted as regards to how corporate governance can be handled. Below I quote verbatim some of the key highlights and how Zimbabwean corporates can learn from these Knowledge nuggets.

In his opening remarks to the section on Board of Directors Warren Buffet says “ My credentials for discussing corporate governance include the fact that, over the last 62 years, I have served as a director of 21 publicly-owned companies. In all but two of them, I have represented a substantial holding of stock. In a few cases, I have tried to implement important change.” The fact that he has served as a director for all these years speaks to the level of experience and depth he as about corporate governance issues. These are the lessons we want to look at below.

  1. “Over the years, many new rules and guidelines pertaining to board composition and duties have come into being. The bedrock challenge for directors, nevertheless, remains constant: Find and retain a talented CEO – possessing integrity, for sure – who will be devoted to the company for his/her business lifetime. Often, that task is hard. When directors get it right, though, they need to do little else. But when they mess it up,......” This so insightful. Without a good CEO, directors can do very little to turnaround the organisation. My own experience shows that the process of appointing a CEO is not done properly in the majority of cases, leading to a series of failures by the whole company. There is just too much self-interested by various stakeholders when appointing the CEO. This has often led to the wrong people being appointed to the role of CEO to the detriment of the organisation. The lesson is that directors must ensure that the process of recruiting and selecting a CEO is based on merit and nothing else.
  2. “Audit committees now work much harder than they once did and almost always view the job with appropriate seriousness. Nevertheless, these committees remain no match for managers who wish to game numbers, an offense that has been encouraged by the scourge of earnings “guidance” and the desire of CEOs to “hit the number.” My direct experience (limited, thankfully) with CEOs who have played with a company’s numbers indicates that they were more often prompted by ego than by a desire for financial gain.” My view is that appointing the wrong people in the executive team can lead to this type of number gaming. Directors need to be on the lookout for such shenanigans as in some instances the whole system from top to bottom could be in this game making it very difficult to detect such practices.
  3. “Compensation committees now rely much more heavily on consultants than they used to. Consequently, compensation arrangements have become more complicated – what committee member wants to explain paying large fees year after year for a simple plan? – and the reading of proxy material has become a mind-numbing experience.” , The desire to avoid making costly mistakes has forced HR Committees to rely on consultants. Depending on the quality of the Consultant, this can give value but in the majority of cases, value is lost as some of the Consultants give no value at all.
  4. “One very important improvement in corporate governance has been mandated: a regularly-scheduled “executive session” of directors at which the CEO is barred. Prior to that change, truly frank discussions of a CEO’s skills, acquisition decisions and compensation were rare.” This practice is rare in Zimbabwean organisation but a very important step in improving the governance culture of the organisation. The challenge, especially in Zimbabwe, is that some directors are beholden to the CEO in whatever they say and do. This is a practice I think will give a lot of value to Zimbabwean organsiations and boards must start practising this.
  5. “Over the years, board “independence” has become a new area of emphasis. One key point relating to this topic, though, is almost invariably overlooked: Director compensation has now soared to a level that inevitably makes pay a subconscious factor affecting the behavior of many non-wealthy members. Think, for a moment, of the director earning $250,000-300,000 for board meetings consuming a pleasant couple of days six or so times a year. Frequently, the possession of one such directorship bestows on its holder three to four times the annual median income of U.S. households. (I missed much of this gravy train: As a director of Portland Gas Light in the early 1960s, I received $100 annually for my service. To earn this princely sum, I commuted to Maine four times a year.)”. In Zimbabwe, while directors get paid retainers and sitting fees, they are nowhere near what directors earn in developed countries. The key question is; could this be impacting on the performance of Board?
  6. “Despite the illogic of it all, the director for whom fees are important – indeed, craved – is almost universally classified as “independent” while many directors possessing fortunes very substantially linked to the welfare of the corporation are deemed lacking in independence. Not long ago, I looked at the proxy material of a large American company and found that eight directors had never purchased a share of the company’s stock using their own money. (They, of course, had received grants of stock as a supplement to their generous cash compensation.) This particular company had long been a laggard, but the directors were doing wonderfully.” Warren Buffet believes directors must have a stake in the company in order for them to give value to the business.
  7. “Nevertheless, many of these good souls are people whom I would never have chosen to handle money or business matters. It simply was not their game.” This is a damming assessment of the quality of some of the directors. It is clear from this assessment that some directors have no clue about how businesses make money and his view is that they probably should not be appointed as directors?
  8. “At Berkshire, we will continue to look for business-savvy directors who are owner-oriented and arrive with a strong specific interest in our company. Thought and principles, not robot-like “process,” will guide their actions. In representing your interests, they will, of course, seek managers whose goals include delighting their customers, cherishing their associates and acting as good citizens of both their communities and our country.” The philosophy seems to be; get directors who have an interest in the company, who will make decisions in the interest of the company.

Memory Nguwi is an Occupational Psychologist, Data Scientist, Speaker, & Managing Consultant- Industrial Psychology Consultants (Pvt) Ltd a management and human resources consulting firm. https://www.linkedin.com/in/memorynguwi/ Phone +263 4 481946-48/481950/2900276/2900966 or cell number +263 77 2356 361 or email: mnguwi@ipcconsultants.com  or visit our website at www.ipcconsultants.com

Editorial Team

This article was written by one of the consultants at IPC

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