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.
- “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. - “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. - “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. - “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. - “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? - “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. - “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? - “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