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Governance Highlights from Warren Buffet's Letter to Shareholders

Editorial Team
02/03/2020 3:51 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

    , 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

    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.

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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