Warren Buffett Central

Business

Every year, over 25 thousand shareholders make their way to Omaha, Nebraska to attend Berkshire Hathaway’s annual meeting. What makes Buffett’s meeting different from many other corporation is the way he treats his shareholders. “Although our form is corporate,” he says, “our attitude is partnership. Charlie Munger and I think of our shareholders as owner-partners, and ourselves as managing partners”. Similar to how investors should buy stocks with a mindset of an owner, Buffett runs Berkshire Hathaway in the mindset of a general partnership. As a result, the annual percentage turnover of Berkshire’s shares is a small fraction compared to other American corporations, even when Buffett’s shares are removed from the calculation.

As a general partner, full disclosure is also important. Buffett believes in fair reporting, detailing “all the important facts about current operations as well as the CEO’s frank view of the long-term economic characteristics of the business.” Buffett also suggests that any accounting methodologies that are vague or unclear often means that management is hiding something. Annual reports should also minimize the use of pictures and messages from a public relations department or consultant as it adds little value. True to Buffett’s statement, all of Berkshire Hathaway’s annual letters are without frills and written by Buffett himself.

Corporations should also set performance standards for its CEO. Often times, it is far easier for an inadequate CEO to keep his job than it is for an inadequate subordinate. A secretary for instance, who was hired for a job that requires the ability to type at least 80 words per minute would be fired in no time if he or she could not perform as expected. However, a CEO has no immediate supervisor whose performance can be measured. As Buffett noted, “if the Board makes a mistake in hiring and perpetuates that mistake, so what? Even if the company is taken over because of the mistake, the deal will probably bestow substantial benefits on the outgoing Board members”. Buffett suggests that boards should be comprised of ten or less individuals mostly from the outside. In addition, they should establish performance standards for the CEO and should meet periodically, without the attendance of the CEO, to evaluate his performance against those standards.