Warren Buffett has written in past letters to his shareholders about corporate governance and the importance of shareholder-oriented directors and management. In his 2002 letter, Buffett wrote about the decline corporate accountability and stewardship and how directors should have prevented mismanagement. The reason why directors failed is because of the “board room atmosphere.”
Directors have rubber-stamped mega-grants of stock options and have not fought for rights and benefits of the shareholders. Buffett also says that most directors have lacked at least one of the following qualities: business savvy, interest in the business, and shareholder-oriented. And when speaking of director independence, Buffett questions how a director can be deemed independent when their compensation accounts for 20% or more of their annual income.
The directors of Berkshire are in a singular class. I’m not sure if Berkshire can provide any more incentives to for the directors to be more shareholder-oriented. First, directors are only paid a “pittance.” Second, Berkshire does not provide liability insurance to the directors. Third, when selecting new directors, Berkshire chooses a person who has held a large amount Berkshire shares for a long time. Berkshire will then determine whether these individuals who have business savvy.
These are three very simple measures that work together to ensure that the directors have the interests of the shareholder closest to their heart and mind. This works well because the directors happen to be some of the largest shareholders.
For a recent example of some changes in a public company that has increased the power of its shareholders, look no farther than H&R Block, a former Berkshire holding. Bloomberg reports:
H&R Block Inc., the biggest U.S. tax preparer, plans to give shareholders more control over the firm’s affairs by holding a vote on executive pay, limiting directors to 12-year terms and dismantling takeover defenses.
The board will be reduced to 12 directors from 15, and the jobs of chairman and chief executive officer will be permanently separated, the Kansas City, Missouri-based company said today in a statement. A “poison pill” designed to discourage takeover bids that expired in March won’t be renewed.
This type of action is refreshing to see as it shows the company trusts the shareholders and provides a better incentive for management to increase shareholder value.
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