Legendary Omaha-based investor Warren Buffett often uses his annual letter to shareholders in Berkshire Hathaway group, where he is chairman and chief executive officer, to impart some homespun financial wisdom and disseminate a few trade secrets. The letter accompanying the conglomerate’s 2009 annual report, released on Saturday, doesn’t disappoint.
Perhaps Buffett’s most pertinent recommendation concerns the corporate governance of large financial institutions. Buffett, 79, strongly believes that the chief executives of banks and other large financial institutions should be accountable for all internal risk-management decisions.
Should risk-management procedures fail — as happened at a great many Anglo-Saxon financial institutions during the credit boom — it is the chief executive who should take the rap, said Buffett.
Buffett wrote: “In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other employment. And if he fails at it — with the government thereupon required to step in with funds or guarantees — the financial consequences for him and his board should be severe.
The crisis sunk many US-based institutions including Lehman Brothers and forced others, such as AIG and Citigroup, to seek government aid. But in Buffett’s view, many guilty CEOs got off too lightly with some keeping their jobs, despite the messes they created, and the financial pain their flawed decisions caused for shareholders.
Buffett wrote: “Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style. It is the behaviour of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price — one not reimbursable by the companies they’ve damaged nor by insurance.
“CEOs and, in many cases, directors have long benefited from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well.”
A longer version of this blog was published on Qfinance on 2 March 2010