Buffett’s Contradictions

Anyone who has read a lot about Warren Buffett will not be surprised by this article. For all his investment savvy and preaching on good corporate governance, he does not always follow his own advice.

Institutional Shareholder Services (ISS), a governance advisory service, recently gave Berkshire a score of just 1.5 out of 100 for the quality of its own corporate governance.

The firm considers 61 variables, such as the independence of the board of directors, executive compensation, how frequently outside auditors are rotated, and whether and how much stock officers and directors own. Some factors are scored together with others. For example, ISS says that a board with both a majority of independent directors and all-independent key committees, such as compensation and audit, will get a higher score than if the company had only one of these.

At Berkshire, there is no compensation committee. Buffett himself sets the compensation for Berkshire's officers. Then he proposes his own salary and bonus and the board votes on it.

Of course, Buffett's $100,000 salary wins praise. But that's not enough to negate at Berkshire what would raise eyebrows at other companies: relatives such as wife, Susan, and son, Howard, on the Berkshire board; directors who own large chunks of Berkshire Hathaway stock; and a lack of sophisticated technology relaying financial data to the CEO.

Buffett fans counter that these issues don't matter. The man took an initial kitty of $500,000 and turned it into a holding company worth $110 billion today. Since 1965, the book value of Berkshire's shares has grown 22% annually, more than doubling the 10% a year growth of the S&P 500.

As a persistently profitable collection of companies that sell paint, carpet, aviation services, energy, underwear, cooking gadgets, bricks and insurance, Berkshire is a unique entity, they say. It can't be judged by the rules that govern the rest of the corporate realm.

"The board may not be independent on paper, but it works well," says Nell Minow, editor at the Corporate Library. This governance research group gives Berkshire an A on a school-style A to F scale. Minow says Berkshire's board works effectively, despite its seeming lack of independence, and she cites Buffett's low salary as responsible. "You have to look at the big picture," Minow says. "[Berkshire is] in a class by themselves."

As a side note, Buffett also lives with a woman named Astrid Menks, while staying married to his wife Susan. Strange character, but he knows a hell of a lot about value investing.

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