Warren Buffett had harsh words for CEOs and directors of failed financial companies who appeared to not suffer serious consequences.
In his annual letter to Berkshire Hathaway Inc. shareholders, published Saturday, Buffett said CEOs and directors should be responsible for the risks they take.
“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,” he wrote. “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.”
Buffett, Berkshire's chairman and CEO, has criticized boards of directors for pay packages that don't reflect CEOs' true performance. In the latest letter, he said shareholders of the companies weren't responsible for the failures.
“Yet they have borne the burden, with 90 percent or more of the value of their holdings wiped out in most cases of failure,” Buffett wrote. “Collectively, they have lost more than $500 billion in just the four largest financial fiascoes of the last two years. To say these owners have been ‘bailed-out' is to make a mockery of the term.
“The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style.
“It is the behavior 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.”
Some of those companies got into trouble by investing in derivatives, an insurancelike financial instrument that ended up creating huge losses through complex transactions that made them highly risky.
Buffett said he oversees the derivative contracts that Berkshire owns, which he expects will make a profit in the long run.
Berkshire earned $486 million in 2009 on its derivatives contracts, and over the past five years it has earned $4.66 billion, even counting a loss of $4.65 billion in 2008. Buffett said he was “delighted” with the contracts Berkshire holds.
Buffett also criticized directors who approve using a company's stock in acquisitions without making sure they are getting full value for its shares.
Boards routinely hire “high-priced investment bankers (are there any other kind?)” to give opinions on whether the target company is fairly priced but also should make sure their own shares are fully valued in a deal, he said.
Otherwise, he said, boards should follow his advice about using advisers: “Don't ask the barber whether you need a haircut.”
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444-1080, steve.jordon@owh.com
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