Monday, June 23, 2014

Crony Capitalists by Buffet's Blessing

if you have not read Vitaliy Ratsenelson's column in II, you are rally missing out on gems and insights into the world of high finance. The June 2014 edition is especially exception and should be required reading. Not only does it cast some doubt on the idea of an 'Oracle from Omaha' but it shines a rather glaring light on the inner workings behind board room doors.

The following is an excerpt for which the entire article can be found here.

There may be some quirky nuances in the alternate universe of corporate governance to which I am not privy, but voting against a compensation plan is not considered going to war in the universe where I live. Buffett has been one of the loudest and most respected critics of exorbitant corporate compensation, but when it came time to lead by example, he did not — unless his message was, when you disagree with excessive compensation, abstain.
But you, dear reader, have heard nothing yet. In another question, Buffett was asked about his son Howard, who sits on the board of Coke and did not vote against its cushy executive compensation plan. Though the elder Buffett did not directly answer that question, his nonanswer sent chills up my spine.
He explained that independent directors are not necessarily independent. Though they don’t work for the company, they make $300,000 a year for attending six meetings. It’s a sweet gig, and they typically do very little to rock that gravy train. Aside from the financial benefit, there is a lot of prestige in being on a major corporate board. Boards don’t look for “dobermans,” Buffett said, “they look for cocker spaniels.” Then he added that when he served on many boards, he approved compensation plans and mergers he did not like.
Pause for a second to digest this. What Buffett told us (I truly applaud him for his honesty) was that corporate boards are not there to protect and serve the interests of shareholders. Their incentives — lavish compensation without any accountability for their actions or nonactions — have created an environment where board members are chosen not by how much value they’ll add to protecting the interests of shareholders but on their pedigrees and, more important, their ability to sing “Kumbaya.”

No comments:

Post a Comment