Board Directors

In the Berkshire Hathaway Annual Letters, Warren Buffett returns repeatedly to the failures and ideal of corporate directors. He argues a board’s two all-important functions are “to obtain (or retain) an able and honest manager and then to compensate that manager fairly,” and that the primary job of Berkshire’s own directors is to select his successor. Buffett is candid that most directors fall short: over forty years on nineteen public-company boards, interacting with some 250 directors, he found the majority were nominally “independent” yet “did not know enough about business and/or care enough about shareholders” to question foolish acquisitions or egregious compensation — and confesses his own “collegiality trumped independence” too often.

His proposed fix is what he calls owner-capitalism. Berkshire’s directors receive token compensation — “no options, no restricted stock and… virtually no cash” — and no liability insurance, so that “if they mess up with your money, they will lose their money as well.” With directors and their families owning over $3 billion in Berkshire shares, they “monitor Berkshire’s actions and results with keen interest and an owner’s eye.” The selection criteria: board members be “owner-oriented, business-savvy, interested and truly independent.” Buffett frames the rule simply — “You win, they win big; you lose, they lose big.”

Where this appears

• Berkshire Hathaway Annual Letters — Buffett’s critique of nominally-independent directors and his owner-capitalism model of compensation and selection