Buffett roasts bosses who hire cocker spaniels rather than pit bulls

Mortality, governance, investments and corporate acquisitions were all traversed in Berkshire Hathaway founder and Omaha oracle Warren Buffett’s latest sermon to shareholders. All this was delivered with the usual combination of folksy wisdom, truisms and a smattering of admissions.

Over his decades buying shares and companies, Buffett has become the messiah of value investing and the world’s greatest critic of short-termism.

Over his decades buying shares and companies, Buffett has become the messiah of value investing and the world’s greatest critic of short-termism.Credit:AP

It’s a strategy that’s been sorely tested over the past few years, as returns from growth shares have trumped those looking for value.

This year’s letter to shareholders is a roller-coaster, aiming its criticisms at corporate advisors, board directors, wrongly-motivated chief executives, the pitfalls of company acquisitions and the stock markets' preoccupation with the issues of the day.

And there are plenty of lessons that could be equally applied to corporate Australia.

On investing in shares, Buffett doesn’t view the $US248 billion ($375 billion) of Berkshire Hathaway’s share market investments as "a collection of stock market wagers – dalliances to be terminated because of downgrades by 'the Street', an earnings 'miss', expected Federal Reserve actions, possible political developments, forecasts by economists or whatever else might be the subject du jour".

Rather, he opines that if something close to the current bond rate prevails over the coming decades and if tax rates remain unchanged, it is almost certain that equities will perform far better over the long-term than fixed-rate debt instruments.

On the topic of chief executives and disclosure, Buffett laments that "[audit] committees remain no match for managers who wish to game numbers, an offence that has been encouraged by the scourge of earnings 'guidance' and the desire of CEOs to 'hit the number'."

In a swipe at analysts, Buffett said his experience of CEOs who have played with a company’s numbers indicates that they were "more often prompted by ego than by a desire for financial gain".

Meanwhile, his advice to boards about assessing acquisitions should be mandatory reading.

"Acquisition proposals remain a particularly vexing problem for board members," according to Buffett who said, "But I have yet to see a CEO who craves an acquisition bring in an informed and articulate critic to argue against it. Overall, the deck is stacked in favour of the deal that’s coveted by the CEO and his/her obliging staff.

The current system, whatever its shortcomings for shareholders, works magnificently for CEOs and the many advisers and other professionals who feast on deals. A venerable caution will forever be true when advice from Wall Street is contemplated: Don’t ask the barber whether you need a haircut."

But Buffett concedes that his record on acquisitions is far from perfect.

"In reviewing my uneven record, I’ve concluded that acquisitions are similar to marriage: They start, of course, with a joyful wedding – but then reality tends to diverge from pre-nuptial expectations.

Sometimes, wonderfully, the new union delivers bliss beyond either party’s hopes. In other cases, disillusionment is swift. Applying those images to corporate acquisitions, I’d have to say it is usually the buyer who encounters unpleasant surprises. It’s easy to get dreamy-eyed during corporate courtships."

Warren Buffett – plenty of disciplesCredit:Bloomberg

And here is another piece of Buffett advice for boards: beware the non-wealthy directors – or NWDs  – a term coined by Buffett.

Buffett says a CEO looking for a director will ask the director’s current CEO if they’re a “good” director, noting good is a code word for someone who has not “seriously challenged his/her present CEO’s compensation or acquisition dreams.”

"If the NWD has seriously challenged his/her present CEO’s compensation or acquisition dreams, his or her candidacy will silently die. When seeking directors, CEOs don’t look for pit bulls. It’s the cocker spaniel that gets taken home."

These pooches often get ignored but they rarely get fired, Buffett notes.

But it will be Buffett and his partner Charlie Munger’s references to their succession that will be closely pored over by Berkshire Hathaway investors. At 89 and 96 respectively, the duo have seen fit to let two key operating managers Ajit Jain and Greg Abel join them on the stage at the upcoming annual meeting.

As for his own future, Buffett employs an anecdote.

"Three decades ago, my Midwestern friend, Joe Rosenfield, then in his 80s, received an irritating letter from his local newspaper. In blunt words, the paper asked for biographical data it planned to use in Joe’s obituary. Joe didn’t respond. So? A month later, he got a second letter from the paper, this one labelled urgent.

Buffett said he and Munger "long ago entered the urgent zone".

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