- The Big Picture - http://www.ritholtz.com/blog -

The Oracle Speaks

Posted By Invictus On March 1, 2010 @ 6:00 am In Corporate Management | Comments Disabled

One of the best annual reads on Wall St. — Warren Buffett’s letter to shareholders — has been posted [1] [PDF]. Barry discussed his take [2] on Sunday; Here are my views:

Of course, the entire letter is worth reading. Here are two of what are, to me, the more notable points — one excoriating the financial press, the other excoriating some of the horrible mismanagement we’ve seen over the past few years. Amen to both (all emphasis in original).

On risk management:

It’s my job to keep Berkshire far away from such [derivatives-related] problems. Charlie and I believe that a CEO must not delegate risk control. It’s simply too important. At Berkshire, I both initiate and monitor every derivatives contract on our books, with the exception of operations-related contracts at a few of our subsidiaries, such as MidAmerican, and the minor runoff contracts at General Re. If Berkshire ever gets in trouble, it will be my fault. It will not be because of misjudgments made by a Risk Committee or Chief Risk Officer.

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. 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.

It has not been shareholders who have botched the operations of some of our country’s largest financial institutions. Yet they have borne the burden, with 90% or more of the value of their holdings wiped out in most cases of failure. Collectively, they have lost more than $500 billion in just the four largest financial fiascos 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 benefitted from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well.

And on the financial press:

Last year we saw, in one instance, how sound-bite reporting can go wrong. Among the 12,830 words in the annual letter was this sentence: “We are certain, for example, that the economy will be in shambles throughout 2009 – and probably well beyond – but that conclusion does not tell us whether the market will rise or fall.” Many news organizations reported – indeed, blared – the first part of the sentence while making no mention whatsoever of its ending. I regard this as terrible journalism: Misinformed readers or viewers may well have thought that Charlie and I were forecasting bad things for the stock market, though we had not only in that sentence, but also elsewhere, made it clear we weren’t predicting the market at all. Any investors who were misled by the sensationalists paid a big price: The Dow closed the day of the letter at 7,063 and finished the year at 10,428.

Given a few experiences we’ve had like that, you can understand why I prefer that our communications with you remain as direct and unabridged as possible.

Buffett’s been around for so long now, one has to wonder why no management at any other company of which I’m aware has adopted his no-nonsense, plain english approach to communicating with both his investors and the public. Seems we’d all be better served if others would follow Buffett’s lead.


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2010/03/the-oracle-speaks/

URLs in this post:

[1] has been posted: http://www.berkshirehathaway.com/letters/2009ltr.pdf

[2] his take: http://www.ritholtz.com/blog/2010/02/berkshire-hathaway-letter-to-shareholders/

Copyright © 2008 The Big Picture. All rights reserved.