Today Warren Buffett shared his thoughts on the current state of corporate boards in his annual shareholder letter (pdf).
First, the legendary investor addressed the dearth of women. When he started out, it was rare to find a woman in the room unless she “represented family controlling the enterprise.” Today, not much has changed—women having a voice in the boardroom continues to be a “work in progress.” This comes after Goldman Sachs announced last month that it won’t take companies public unless they have at least one “diverse” member on the board.
Another problem is that directors are more likely to go along with management teams than to challenge them—and CEOs are more likely to look for a “cocker spaniel” than “pit bulls” for the board. Having served as a director of 21 publicly owned companies (including Berkshire, Kraft Heinz, Coca-Cola, and Gillette), Buffett has yet to see a CEO who craves an acquisition bring in a board member who is against it—including himself. In other words, the arrangement is almost always in favor of the CEO looking to make the acquisition. “Don’t ask the barber whether you need a haircut,” he suggested.
Directors also depend on their board pay too much to act as truly independent entities, Buffett believes. Director compensation has soared to a level that is “three to four times the annual median income of US households,” he noted. At large companies, the median director’s pay is $275,000, according to one report (pdf).
Further, he noted, many board members today are simply not business types: “Almost all of the directors I have met over the years have been decent, likable and intelligent. Nevertheless, many of these good souls are people whom I would never have chosen to handle money or business matters. It simply was not their game.”
One important improvement in corporate governance has been regularly scheduled “executive sessions” of directors at which the CEO is barred, wrote Buffett. Before that, separate discussions of a CEO’s skills, acquisition decisions, and compensation were rare.
Still, he believes, the process of improving corporate governance has a long way to go.