Buffett thinks that managers are custodians of shareholder capital. Indeed, the best ones think like shareholders when making decisions. It seems they have shareholders interest at heart.
But even the best managers' interests conflict with those of shareholders. What is important is that they have fluid communication to be able to solve any problem.
Buffett considers that mapping a chain of command is good and having first-rate people is more important than designing hierarchies.
The major reforms are usually focused on aligning management and shareholders’ interests or improving the board of director's control of CEOs' performance.
For a long time there have been different ways that were deemed useful to foster good corporate governance, e.g., awarding stock options to management, emphasizing board process; separating the functions of the chairman and the board, appointing standing audit, nominating and compensating committees.
Unfortunately, none of them have solved governance problems in their entirety.
Buffett considers that the best solution is to identify CEOs that will have high performance regardless structural weaknesses and restraints. Indeed, outstanding CEOs do not need any coaching.
In terms of directors, Warren believes it is best to choose savvy directors with interest and owner-orientation.
In general in corporate America, directors are chosen for completely different reasons, to wit, to add diversity and prominence. And that does not bring positive results at all.
Most corporate governance-related reforms are made without noticing that there are differences among types of boards. Buffett can clearly identify them.
For instance, the power of a director is not strong if the company has a controlling shareholder who is also involved in management. Disagreements between both leave the director with a narrow margin and the only chance he has is to object or even resign. On the contrary, if there is a controlling shareholder but this shareholder does not get involved in managerial stuff, then the Director has a broader margin to act.
How is this latter case achieved? For Buffett, it can be achieved through having a small BOD mainly made up of outside directors. The strongest weapon outside directors have is the power of resigning.
Another defect Buffett sees in corporate governance is the fact that companies allow chief executives to attend regular meetings where shareholders should discuss the formers´ performance. That is completely unacceptable.
In this type of situations both short-term and long-term results must be considered. If only short-term results were important, managerial decisions would be much easier; especially in companies with big economic problems. But Buffett is a long-term player.
Let´s look at an example of an aggressive measure taken at a company. Al Dunlap fired half of Sun beam´s workers and closed or consolidated most of its facilities, including some in the textile business in New England to do away with grumbling.
Al Dunlap was driven by short-term results. That facilitated his decision.
Last but not least, management and shareholders’ interests may also conflict in other ways, for instance, in terms of corporate philanthropy. At most corporations, management invest a portion of corporate profit in charities. The latter are usually chosen by management, which, according to law, is entitled to make such investments insofar only 10% of the annual profits are targeted to that cause.
However, the investing expert, Buffett thinks differently. Shareholders should choose the charities.
There are some differences in corporate governance philosophy. Corporation America takes path that generally do not match Buffett's ideas.
In a nutshell, for Buffett, emphasis should be placed on performance, which must be measured by profitability.
If a company decides to grant stock options, their award must depend on individual performance rather than on corporate performance and on business value.
That is how he thinks companies should be managed.
But even the best managers' interests conflict with those of shareholders. What is important is that they have fluid communication to be able to solve any problem.
Buffett considers that mapping a chain of command is good and having first-rate people is more important than designing hierarchies.
The major reforms are usually focused on aligning management and shareholders’ interests or improving the board of director's control of CEOs' performance.
For a long time there have been different ways that were deemed useful to foster good corporate governance, e.g., awarding stock options to management, emphasizing board process; separating the functions of the chairman and the board, appointing standing audit, nominating and compensating committees.
Unfortunately, none of them have solved governance problems in their entirety.
Buffett considers that the best solution is to identify CEOs that will have high performance regardless structural weaknesses and restraints. Indeed, outstanding CEOs do not need any coaching.
In terms of directors, Warren believes it is best to choose savvy directors with interest and owner-orientation.
In general in corporate America, directors are chosen for completely different reasons, to wit, to add diversity and prominence. And that does not bring positive results at all.
Most corporate governance-related reforms are made without noticing that there are differences among types of boards. Buffett can clearly identify them.
For instance, the power of a director is not strong if the company has a controlling shareholder who is also involved in management. Disagreements between both leave the director with a narrow margin and the only chance he has is to object or even resign. On the contrary, if there is a controlling shareholder but this shareholder does not get involved in managerial stuff, then the Director has a broader margin to act.
How is this latter case achieved? For Buffett, it can be achieved through having a small BOD mainly made up of outside directors. The strongest weapon outside directors have is the power of resigning.
Another defect Buffett sees in corporate governance is the fact that companies allow chief executives to attend regular meetings where shareholders should discuss the formers´ performance. That is completely unacceptable.
In this type of situations both short-term and long-term results must be considered. If only short-term results were important, managerial decisions would be much easier; especially in companies with big economic problems. But Buffett is a long-term player.
Let´s look at an example of an aggressive measure taken at a company. Al Dunlap fired half of Sun beam´s workers and closed or consolidated most of its facilities, including some in the textile business in New England to do away with grumbling.
Al Dunlap was driven by short-term results. That facilitated his decision.
Last but not least, management and shareholders’ interests may also conflict in other ways, for instance, in terms of corporate philanthropy. At most corporations, management invest a portion of corporate profit in charities. The latter are usually chosen by management, which, according to law, is entitled to make such investments insofar only 10% of the annual profits are targeted to that cause.
However, the investing expert, Buffett thinks differently. Shareholders should choose the charities.
There are some differences in corporate governance philosophy. Corporation America takes path that generally do not match Buffett's ideas.
In a nutshell, for Buffett, emphasis should be placed on performance, which must be measured by profitability.
If a company decides to grant stock options, their award must depend on individual performance rather than on corporate performance and on business value.
That is how he thinks companies should be managed.
