Warren Buffett has taken aim at corporate boards, calling for companies to make directors more independent and involved in the affairs of the company they oversee.
In his annual letter to Berkshire Hathaway shareholders, released on Saturday Buffett suggested one way of getting them to act more in the interests of shareholders and not management, would be to pay them less by forcing them to buy more shares in their companies.
In his letter to Berkshire Hathaway said pay for outside directors has “soared” to levels that might threaten their independence, sometimes reaching $US250,000 to $300,000 for two weeks work, while “generous” age limits ensure “fabulous” job security.
Buffett said this can make even “independent” directors resist challenging bad decisions by CEOs, especially in takeovers.
“Overall, the deck is stacked in favor of the deal that’s coveted by the CEO and his/her obliging staff. It would be an interesting exercise for a company to hire two “expert” acquisition advisors, one pro and one con, to deliver his or her views on a proposed deal to the board – with the winning advisor to receive, say, ten times a token sum paid to the loser.
“Don’t hold your breath awaiting this reform:
“The current system, whatever its shortcomings for shareholders, works magnificently for CEOs and the many advisors and other professionals who feast on deals. A venerable caution will forever be true when advice from Wall Street is contemplated: Don’t ask the barber whether you need a haircut.
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.)
And job security now? It’s fabulous. Board members may get politely ignored, but they seldom get fired. Instead, generous age limits – usually 70 or higher – act as the standard method for the genteel ejection of directors.
“When seeking directors, CEOs don’t look for pit bulls,” Buffett wrote. “It’s the cocker spaniel that gets taken home.”
He said one large American company he did not identify recently had eight directors who never bought its shares with their own money.
“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,” Buffett wrote in his letter.
“I feel better when directors of our portfolio companies have had the experience of purchasing shares with their savings, rather than simply having been the recipients of grants.”
He said no Berkshire director was paid more than $US7,300 for their work at the company in 2018, a regulatory filing shows, though several including Buffett, Vice-chair, Charlie Munger and Microsoft Corp co-founder Bill Gates are billionaires, and can afford it.
No spring chickens though on the 14-person Berkshire, with six directors — including the 89-year-old Buffett — over age 70 and three in their 90s, including vice chair, Charlie Munger who is 96.
“… I’d like you to know that almost all of the directors I have met over the years have been decent, likable and intelligent. They dressed well, made good neighbors and were fine citizens. I’ve enjoyed their company.
“Among the group are some men and women that I would not have met except for our mutual board service and who have become close friends. 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.
Buffett also said adding women to boards “remains a work in progress.” Three Berkshire directors are women.
Buffett said he has been a director at 21 publicly-traded companies including Coca-Cola Co, Kraft Heinz Co and Washington Post Co, and in all but two “represented a substantial holding of stock.”
He has given up all directorships apart from Berkshire, one of several moves in recent years to reduce his workload.
