Excerpts from Mr. Buffett’s Letter to the Shareholders of Berkshire Hathaway Inc.

Boards of Directors

In recent years, both the composition of corporate boards and their purpose have become hot topics. Once, debate about the responsibilities of boards was largely limited to lawyers; today, institutional investors and politicians have weighed in as well.

 

My credentials for discussing corporate governance include the fact that, over the last 62 years, I have served as a director of 21 publicly-owned companies. In all but two of them, I have represented a substantial holding of stock.

 

In a few cases, I have tried to implement important change. During the first 30 or so years of my services, it was rare to find a woman in the room unless she represented a family controlling the enterprise.

 

Corporate Governance

 

One very important improvement in corporate governance has been mandated: a regularly-scheduled “executive session” of directors at which the CEO is barred. Prior to that change, truly frank discussions of a CEO’s skills, acquisition decisions and compensation were rare.

 

Board Composition

 

Over the years, many new rules and guidelines pertaining to board composition and duties have come into being. The bedrock challenge for directors, nevertheless, remains constant: Find and retain a talented CEO – possessing integrity, for sure – who will be devoted to the company for his/her business lifetime. Often, that task is hard. When directors get it right, though, they need to do little else. But when they mess it up...

 

Women’s Status in a Board Room remains a Work in Progress

 

This year, it should be noted, marks the 100^th anniversary of the 19^th Amendment, which guaranteed American women the right to have their voices heard in a voting booth. Their attaining similar status in a board room remains a work in progress.

 

Directors and Independent Directors

 

One key point relating to this topic, though, is almost invariably overlooked:

 

Director compensation has now soared to a level that inevitably makes pay a subconscious factor affecting the behaviour of many non-wealthy members. Think, for a moment, of the director earning $250,000-300,000 for board meetings consuming a pleasant couple of days, six, or so times a year.

 

Despite the illogic of it all, the director for whom fees are important – indeed, craved – is almost universally classified as “independent” while many directors possessing fortunes very substantially linked to the welfare of the corporation are deemed lacking in independence. Not long ago, I looked at the proxy material of a large American company and found that eight directors had never purchased a share of the company’s stock using their own money. (They, of course, had received grants of stock as a supplement to their generous cash compensation.) This particular company had long been a laggard, but the directors were doing wonderfully.