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Warren Buffett's annual letter


Highlights


In many aspects we live life as if we were immortals. As if many events that depend on the will of a third party will never stop happening, it’s the case with the publication of the letter that every February, for decades, Warren Buffet writes to the shareholders of Berkshire Hathaway. From the letter of this year, when W. Buffett will turn 90, we chose to share with our readers his thoughts on changes in corporate governance practices in the last 62 years.

In many aspects we live life as if we were immortals. As if many events that depend on the will of a third party will never stop happening, it’s the case with the publication of the letter that every February, for decades, Warren Buffet writes to the shareholders of Berkshire Hathaway.


Every year the market expects this letter with great anxiety not only for the traditional accountability, which includes for some years very brief comments on the succession plans of a company where the two main leaders, Warren Buffett and Charles Munger, will turn in 2020, 90 and 96 years respectively, but also because of the sharp reflections Mr. Buffett makes about the corporate world, industrial trends and American politics.


This year he didn't want to talk about politics, maybe because there will be presidential elections in the US in November, instead he chose to talk about the role of the directors in the boards of the corporations, noting that in a not so remote past, the lawyers were the ones leading the debate on the responsibilities of the members of the boards, nowadays the institutional investors and professional politicians have entered into such debate as strong opinion makers.


Buffett also spoke of a pending subject: to achieve greater participation of women in the boards of directors. Although he acknowledged that thirty years ago, the only women members of the corporate directories were those who were part of the families that controlled the company, today there are many more, but gender equity is still far from being a reality.


No matter how much progress has been made in the implementation of rules and procedures that reinforce the proper functioning of the directories, according to Buffett there is a challenge that will always be present: finding and retaining an executive president, who is talented and honest, and willing to dedicate the rest of his or her professional life to the company. When this is accomplished, the work of the members of the board of directors is really simple, when this is not the case, everyone's life is complicated.


Currently, audit committees work many more hours and more seriously than in the past, unfortunately these committees do not always get corporate managers that match them in intentions and interests. W. Buffett recalls a few CEOs who manipulated figures, not so much for interests related to profits, but more to satisfy their egos.


Compensation committees are increasingly supported by expensive external consultants, so managers' compensation plans become more complicated to understand. Is it perhaps because it is difficult to justify the high fees that these advisors receive for preparing a simple compensation plan?


A good corporate governance practice that has emerged over the years is the periodic meeting of the board of directors without the executive president. Before the implementation of this practice it was very rare to participate in a board of directors in which anything about the skills of the executive president, his proposals about corporate acquisitions and his remuneration were discussed frankly.


Acquisition proposals are still a particularly complex problem for members of the board. The legal orchestration to make deals has been refined, becoming more complex and costly. However, executive presidents continue to act defensively when someone objects to a corporate acquisition that they want a lot, W. Buffett confesses that he also behaves sometimes in the same way. Today there is still a great bias towards corporate acquisitions that enjoy the favor of the executive president and his collaborators.


Another aspect that worries W. Buffett is how to manage to recruit truly independent directors, in those corporations where compensation per attended meeting can be around three hundred thousand dollars. Unfortunately, he does not make recommendations in this regard.


For W. Buffett the must have attributes of a good CEO have not changed, in essence, in the last sixty years: they must be people with business acumen, committed to the well-being of the shareholders and with very specific interests in the companies whose boards they sit on.

Hopefully this is not the last letter from W. Buffett to the shareholders of Berkshire Hathaway. Sometime that last letter will come to remind us that although we are not immortals, we always have the option of trying to be relevant, and Mr. W. Buffett has been really relevant.

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