Governance Highlights from Warren Buffet's Letter to Shareholders

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

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

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

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Memory\nNguwi is an Occupational Psychologist, Data Scientist, Speaker, & Managing\nConsultant- Industrial Psychology Consultants (Pvt) Ltd a management and human\nresources consulting firm. https://www.linkedin.com/in/memorynguwi/ Phone +263 4\n481946-48/481950/2900276/2900966 or cell number +263 77 2356 361 or email: mnguwi@ipcconsultants.com  or visit our\nwebsite at www.ipcconsultants.com