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He’s a legend in the business world and still active in his eighties.He is the company and the company is him.He knows the insurance business like the back of his own hand.He takes successes and the rare failures very personally.“He is the Chief Risk Officer and believes that this role cannot be outsourced to a committee.”
He serves as CEO and the Chairman of the Board.He is obsessed with work and prides himself on the work ethic of his protégés.He’s constantly asked for his opinion on foreign policy, the economy, and the future of emerging markets like China.He’s got the travel schedule of a foreign diplomat but leads a simple, spartan life when at home.There was a time when people thought he could make no mistakes.His company delivers consistent returns for shareholders, but size makes it difficult to continue delivering better than average returns without taking on greater risks.He shies away from businesses he doesn’t understand personally but is known for being a quick study and very decisive.The final decision on any acquisition is his, given his significant personal ownership in the company.
The above statements have been made by or about Warren Buffett.
They also describe Maurice “Hank” Greenberg when he ran AIG.
Some have said Buffett is more honest than Greenberg ever was. After all,Eliot Spitzer never accused Buffett of accounting manipulation. But both Buffett and Greenberg have been very successful at creating plausible deniability when legal and regulatory failures occurred in their companies.
Hank Greenberg was recently duped by China Media Express (CCME), alleged to be a Chinese reverse merger fraud, and blames its executives and auditor, Deloitte China, for lying to him. It must be tough for the famously detail-oriented China aficionado with Buddha – like knowledge of Chinese business methods and mores – Greenberg was doing business in China before it was CHINA – to claim he was taken for a rickshaw ride.
C.V. Starr Asia, Greenberg’s company, claims in its lawsuit to have been “fraudulently induced” to buy 1.5 million of CCME common shares worth $13.5 million. Those shares were worth almost $30 million when things started to unravel.
On the other hand, there’s Warren Buffett and his sidekick, Vice Chairman Charlie Munger. They eschew investment banker projectionsand prepare their own financial analyses that, according to statements made at the Berkshire Hathaway Annual Meeting this past weekend, are maintained in a very safe place.
“I don’t pay attention,” he says, [referring to investment bankers’ financial projections and prospectuses on target companies] and compares it to “asking the barber if you need a haircut.” This is a frequent Buffett trope.Buffett says that he and Munger keep financial projections in their heads, rather than rely on the bankers’ spreadsheets.
Buffett and Munger unashamedly count on gut-level instinct and the naive assumption that telegraphing their expectation of honesty and ethical behavior is sufficient to avoid doing business with, or employing, any scoundrels.
The New York Times’ Michael de la Merced recorded a response to colleague Andrew Ross Sorkin’s question on this issue:
DealBook’s Andrew Ross Sorkin asks: Given what’s happened, why doesn’t Berkshire institute stricter controls for employees’ trades?Buffett’s answer hinges on trust….To Buffett, his view appears to boil down to this. People determined to break the rules will do so, regardless of compliance policies. How can the company stop someone from trading in his cousin’s name?Munger adds that having a big compliance department doesn’t necessarily preclude problems. Wall Street banks have armies of compliance officers and still suffer huge numbers of scandals. (His exact words were “the most scandals.”)“This general culture of trust is important,” Munger says. “And you know, Berkshire hasn’t had that many scandals of consequence.”
Another attendee recorded the Munger quote this way:
Culture is much more important than rules in preventing scandals.
Note to Munger: Culture – “tone at the top” – may prevent some legal and regulatory compliance lapses. Compliance processes and audits may detect others. But enforcement of penalties – timely, consistent, strong and, dare I say, ruthless and sometimes angry – is the best overall deterrent to lapses ever happening again.
How should the Sokol investigation have been done? James McGrath of corporate investigations firm McGrath & Grace has some ideas:
While it might not be old school in the vein preferred by Buffett and Munger, there are solid reasons why the ABA, ACC, and ACTL all recommend utilizing specialized outside counsel for critical internal investigations as one of their most recent best practices. Of those reasons, credibility is at the top of the list. It has the capacity to set the tone for enforcement actions by the government, reporting by the media, and defenses to shareholder derivative actions. And the importance of these to public image and share price cannot be overstated.
Buffet and Munger reiterated their approach to compliance and their unwillingness and inability to keep a close eye on 260,000 employees at a press conference the next day.
Michael de la Merced in the New York Times, May 1:He said he planned no major changes to Berkshire’s management practices, which largely leave the executives of the company’s subsidiaries to operate as they please. Mr. Buffett said he thought of himself as an “intelligent shareholder,” and that he had not heard from some of his managers in a year or more.With more than 260,000 employees working for him around the world, something can and will inevitably go wrong, Mr. Buffett said.His longtime investing partner, Berkshire’s vice chairman, Charles Munger, addressed the issue more bluntly. “We’ve had a close brush with scandal two times in 50 years,” he said Sunday. “We’re not going to devote a lot of time to this.”
In a one-on-one interview with Andrew Ross Sorkin, Buffett again says he can’t do much about it. There may be other legal and regulatory compliance issues hiding in Berkshire Hathaway.
“With 260,000 people, someone’s doing something wrong even as we talk.”
Hey SEC! Are you listening?
In contrast to their well-honed reputation as a “1-2 punch” executive tag team that runs the company and the board of directors, Buffett and Munger are quite nonchalant when it comes to catching mistakes – each other’s or those of their employees. CNBC’s Becky Quick posed a question during the Saturday Annual Meeting Q&A about “lessons learned”:
Becky Quick: Could you please let us know some of the most important things learned in the last year?Buffett: What I learned is to have Charlie write the next press release.Munger: I approved that damned release with no objections. BRK shareholders will be in a lot of trouble if they are depending on Charlie to find Warren’s errors.
Several reporters asked Buffett about his strategy for investing outside the United States. He told them all, sure, he’ll invest if the numbers are right.
Buffett and Munger stand by their investment in electric car maker BYD in spite of, according to Reuters, product delays and declining sales. They’re also ignoring reports that BYD is mentioned unfavorably in diplomatic cables disclosed by WikiLeaks. And they spent time more than once over the weekend trying to explain away David Sokol’s mention, in a CNBC interview, of Charlie Munger’s investment in BYD prior to Berkshire’s as an “everyone else was doing it,” defense to his own actions.
Munger, at least, seems to recognize the challenges, especially, to investing in countries far away from from the United States and far different than Omaha:
The Washington Post: Munger said the problem is that India seems to have adopted more of the western world’s vices than its virtues. Munger said India’s bloated bureaucracy and widespread bribery are slowing the country’s economic growth.“That is a country with a lot of dysfunction in it,” Munger said.
Munger was also quoted on Sunday saying, “The only real problem facing China is corruption…The poverty of India is less justified than the poverty of China… India has absorbed our vices, not our virtues. They’d do better to mimic Singapore.”
The Telegraph UK: When Buffett began life in 1956 with Buffett Associates, its focus was just on buying stakes in public companies rather than whole businesses. But late 2009 saw Berkshire pay $44bn, including assumed debt, for Burlington Northern Santa Fe, America’s second-biggest railroad. It showed that, in sharp contrast to many, the country’s worst financial crisis since the recession hadn’t dented his appetite for betting on the US….Buffett has made clear that his broad strategy isn’t going to change while he’s still at the helm.However, those who track Berkshire say that his eventual successor may choose to expand Berkshire’s horizon beyond the US and tap the investment opportunities in India, China and Brazil.
Berkshire Hathaway has international exposure without ever buying any foreign companies based on investments in Coca-Cola, Procter & Gamble, and the insurance subsidiaries.
Notes from the Berkshire Hathaway 2011 Annual Meeting, The Inoculated Investor.com:In Q1, BRK had the 2nd worst quarter in the insurance business in terms of catastrophes around the globe. Usually Q3 is the worst due to hurricanes in the US in September. For example, the 3rd quarter was the record quarter during the Katrina year. In Q1 of this year, we have had some major catastrophes in Asia. These hit the re-insurance business very hard. No one knows how much it will cost in aggregate—probably around $50B.Based on BRK’s market share, the company expects to participate in about 3-5% of those losses. (Referencing the slides) Overall, the earnings are as they are normally presented. Insurance underwriting lost $821M after tax. Warren suggested that normal BRK yearly earnings power is around $12B after tax, assuming that the insurance underwriting breaks even. For 8 years they have been profitable in insurance, but are unlikely to be so for 2011.
Note to Buffett: Learn a lesson about China, and due diligence in general, from Hank Greenberg – The world is full of scoundrels.
It may be time to park the corporate jet, rest those tired “dogs”, nap some, shovel peanut brittle into that pie-hole, and play more bridge.
source: forbes.com
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