Boardroom Atmosphere

In today’s New York Times, Gretchen Morgenson writes the following:

“ARE the days of the cocooned corporate director finally coming to an end? One can only hope. Even though directors — through the boards they sit on and the various committees they oversee — are supposed to keep wayward or incompetent chief executives at bay, all too often they are, in practice, just cronies of management.

For years, shareholders have done little to voice complaints about such cozy relationships, but it seems that the financial fiasco of the last few years, and the lackadaisical performance by directors at major banks that contributed to the meltdown, is encouraging investors to become more vocal.

Signs of such a welcome development can be seen in the results of this year’s director elections at annual corporate meetings. According to an early assessment of these shindigs, shareholders voiced significantly greater opposition to directors who were up for election this year than they did in 2008. Although such “no” votes aren’t binding, they send a powerful message that should reverberate throughout corporate board rooms.

Investors are clearly angry with their companies, and they have their reasons. Director accountability to the shareholders they are supposed to serve has been sorely lacking for decades. Even as they rubber stamp risky corporate practices and excessive executive pay, directors continue to win re-election to their increasingly lucrative board seats.

It is unfortunate that the only way to force some directors to live up to their duties is for shareholders to keep them worried about an embarrassing vote. But since that is the only weapon investors have, it’s gratifying that more of them seem ready to rumble.”
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Gretchen Morgenson, Too Many ‘No’ Votes to Be Ignored, New York Times, September 20, 2009

As early as 1993, Warren Buffett has spoken out on the abuses of “Boardroom Atmosphere.” Following is only a short sample, chronologically, of his views:

“…Directors should behave as if there was a single absentee owner, whose long-term interest they should try to further in all proper ways….

And if able but greedy managers over-reach and try to dip too deeply into the shareholders’ pockets, directors must slap their hands……

The outside board members should establish standards for the CEO’s performance and should periodically meet, without his being present, to evaluate his performance against these standards."
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Warren Buffett, 1993 Letter to Berkshire Hathaway Shareholders

“Why have intelligent and decent directors failed so miserably? The answer lies not in inadequate laws-it’s always been clear that directors are obligated to represent the interests of shareholders-but rather in what I’d call “boardroom atmosphere.

It’s almost impossible, for example, in a boardroom populated by well-mannered people, to raise the question of whether the CEO should be replaced. It’s equally awkward to question a proposed acquisition that has been endorsed by the CEO, particularly when his inside staff and outside advisors are present and unanimously support his decision. (They wouldn’t be in the room if they didn’t.) Finally, when the compensation committee – armed, as always, with support from a high-paid consultant – reports on a mega grant of options to the CEO, it would be like belching at the dinner table for a director to suggest that the committee reconsider…..

. In recent years compensation committees too often have been tail-wagging puppy dogs meekly following recommendations by consultants, a breed not known for allegiance to the faceless shareholders who pay their fees. (If you can’t tell whose side someone is on, they are not on yours.) True, each committee is required by the SEC to state its reasoning about pay in the proxy. But the words are usually boilerplate written by the company’s lawyers or its human-relations department. This costly charade should cease.

The acid test for reform will be CEO compensation. Managers will cheerfully agree to board
“diversity,” attest to SEC filings and adopt meaningless proposals relating to process. What many will fight, however, is a hard look at their own pay and perks.

Directors should not serve on compensation committees unless they are themselves capable of negotiating on behalf of owners. They should explain both how they think about pay and how they measure performance. Dealing with shareholders’ money, moreover, they should behave as they would were it their own.

In the 1890s, Samuel Gompers described the goal of organized labor as “More!” In the 1990s,
America’s CEOs adopted his battle cry. The upshot is that CEOs have often amassed riches while their shareholders have experienced financial disasters.

Directors should stop such piracy. There’s nothing wrong with paying well for truly exceptional business performance. But, for anything short of that, it’s time for directors to shout “Less!” It would be a travesty if the bloated pay of recent years became a baseline for future compensation. Compensation committees should go back to the drawing boards."
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Warren Buffett, 2002 Letter to Berkshire Hathaway Shareholders

“True independence-meaning the willingness to challenge a forceful CEO when something is wrong or foolish-is an enormously valuable trait in a director. It is also rare."
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Warren Buffett, 2003 Letter to Berkshire Hathaway Shareholders

“At Berkshire, board members travel the same road as shareholders.”
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Warren Buffett, 2004 Letter to Berkshire Hathaway Shareholders