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Warren Buffett speaks of Women on boards and ‘Non-Wealthy Directors’ for the first time in his annual letter to the shareholders
Warren Buffett, in his annual letter to the shareholders of Berkshire Hathaway, has for the first time talked about having women on corporate boards. In his 43rd letter to the shareholders, published over the weekend, Buffett wrote: ‘During the first 30 or so years of my services, it was rare to find a woman in the room unless she represented a family controlling the enterprise. This year, it should be noted, marks the 100th anniversary of the 19th Amendment, which guaranteed American women the right to have their voices heard in a voting booth. Their attaining similar status in a board room remains a work in progress’.
Over the last 62 years, Buffett has served as a director of 21 publicly-owned companies. In all but two of them, he has represented a substantial holding of stock. In a few cases, he ‘tried to implement important change’. Buffett’s statement comes on close heels of Goldman Sachs reinforcing its commitment to gender and racial diversity at the board level. Last month, the investment banking major announced that it will no longer take a company public unless the company has at least one woman or non-white board member.
The terms ‘corporate governance’ and ‘audit committee’ have appeared for the first time in 15 years in the much-awaited annual communication of the ace global investor. The 89-year old ace investor came down heavily on the governance practices of companies – citing his own experiences.
‘I have yet to see a CEO who craves an acquisition bring in an informed and articulate critic to argue against it. And yes, include me among the guilty’, he wrote. Buffett suggests that 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.
In his letter, Buffett also delved on the independence of board and highlighted director compensation as a key point that is ‘almost invariably overlooked’. He cited an example 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 US households’. Buffett himself 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’, he revealed in his letter.
According to Buffett, because of the factors of compensation and job security, a ‘non-wealthy director (NWD)’ now hopes – or even yearns – to be asked to join a second board, thereby vaulting into the $500,000-600,000 class. To achieve this goal, the NWD will need help. The CEO of a company searching for board members will almost certainly check with the NWD’s current CEO as to whether NWD is a “good” director (a code word). If the NWD has seriously challenged his/her present CEO’s compensation or acquisition dreams, his or her candidacy will silently die. ‘When seeking directors, CEOs don’t look for pit bulls. It’s the cocker spaniel that gets taken home’, Buffett wrote. ‘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’.
Buffett also commented on audit committees in his letter, after last mentioning them in his 2004 communique. ‘The 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”’.
He also wrote of compensation committees now relying much more heavily on consultants than they used to. ‘Consequently, compensation arrangements have become more complicated and the reading of proxy material has become a mind-numbing experience’.
Buffett also admitted that – ‘almost all of the directors I have met over the years have been decent, likable and intelligent. They dressed well, made good neighbours 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’.