Author Archive for lawrence-cunningham

posted by Lawrence Cunningham

Most under-appreciated thing about Warren Buffett: he built Berkshire to last well beyond him.  (LAC, at BRK annual meeting via Motley Fool, here.)

  May 22, 2013 at 9:34 pm   Posted in: Asides, Symposium (The Essays of Warren Buffett: Lessons for Corporate America)   Print This Post   No Comments

posted by Lawrence Cunningham

Cardozo Law School’s Susan Crawford battles telecom giants, per NYT here.  (LAC)

  May 21, 2013 at 11:33 am   Posted in: Asides   Print This Post   No Comments

Introducing Symposium: The Essays of Warren Buffett

posted by Lawrence Cunningham

We at Concurring Opinions are delighted to welcome a dozen luminaries and thousands of readers to this week’s on-line symposium featuring The Essays of Warren Buffett: Lessons for Corporate.  

I began studying Warren Buffett’s letters to the shareholders of Berkshire Hathaway in 1992 when researching what became my first scholarly article, tracing the intellectual history of efficient market theory.  The letters went against the grain of prevailing academic work, so they served as a sort of contrary exhibit rather than supporting many standard assertions.  

The letters were smart, witty, arresting and expansive, addressing governance, mergers, investing, accounting, taxes and many other topics I would spend my career teaching and writing about. I could not put them down. Yet nor could I, acting alone, give them a place of respect in the academy that I thought they deserved but had not received.

So I decided to host a symposium featuring the letters, gathering a group of 20 scholars to dissect their content. Through Monroe Price, then Dean of Cardozo Law School, where I worked, I contacted Bob Denham, a close Berkshire adviser then and now, who passed along my proposal, which Warren embraced.

The centerpiece of the conference was a collection of Buffett’s letters, which I had rearranged thematically, and would later publish as The Essays. The arrangement both enabled a correspondence between the collection and the panel topics and papers, as well as the emergence of an unmistakable organizing principle: the fundamental idea that price and value are different things.

That meant that stock markets are not so efficient as to invariably produce a price that is a reliable proxy for value. This idea is so deep, and was so contrary to academic literature and classroom teaching, that it received an entire section of the collection and separate panel at the symposium. But it was even larger because pretty much all the other principles in The Essays—about governance, mergers, accounting and so on—followed from that tenet.

Since the conference edition (1997), we published a revised first edition (2001), a second edition (2008) and now a third edition (2013), in each case maintaining the themes that have animated the material from the beginning while adding discussion of contemporary issues that radiate from them.

We have often thought of hosting a reunion symposium on The Essays and this week, thanks to the generosity of a dozen luminaries, we do so.  Following is a run-down of the participants in this week’s symposium, half of whom participated in the original.  They are listed in roughly the order in which their contributions appear (with links to pieces as they have been posted).

[To see all posts in the symposium grouped together, click the following link, which also appears below every post in the symposium: "Symposium: The Essays of Warren Buffett: Lessons for Corporate America."]

Read the rest of this post »

  May 20, 2013 at 7:00 am   Posted in: Symposium (The Essays of Warren Buffett: Lessons for Corporate America)   Print This Post   No Comments

posted by Lawrence Cunningham

University governance as a new topic of public discussion.

  May 15, 2013 at 7:05 am   Posted in: Asides   Print This Post   No Comments

Wachtell Lipton’s Errors on Shareholder-Paid Director Bonuses

posted by Lawrence Cunningham

Amid debate over shareholders offering contingent payments to directors, Wachtell Lipton recommends an option that may be tempting for incumbent boards: unilaterally adopting a bylaw banning the arrangements.  Boards should be wary of this advice.

True, Wachtell’s position concurs with my view that such payments are lawful, contrary to the position urged by my esteemed fellow corporate law Prof., Stephen Bainbridge.  But that’s where Wachtell and I part company, first because Wachtell’s proposal is myopically universal and second because it errs on a basic legal point about board and shareholder power.

In my view, not only are the arrangements lawful, but shareholder bodies ought to have the choice to embrace or reject them.  My guess is that they are desirable for some corporations in some settings and not so for others.  Therefore, the use or rejection of these ought to be determined, as with much else in corporate life and law, in context by business people participating in particular governance situations. Read the rest of this post »

  May 11, 2013 at 1:10 pm   Posted in: Corporate Law, Current Events   Print This Post   5 Comments

Max Olson Helps Berkshire Hathaway with Letter Compilation

posted by Lawrence Cunningham

Berkshire annual reports of the late 1980s and early 1990s (some pictured at left), all stated that compilations of letters from earlier annual reports, dating to 1977 (also pictured), were available on request from the company without charge.  By the mid-1990s demand had begun to rise, prompting a new policy: continuing to offer the historical compilations to shareholders for free, but charging non-shareholders $15 (for production and shipping).

Beginning with the 1997 report, the letters, again dating to 1977, were made freely available on the internet (and they still are there).  The two-volume historical compilation remained available, but now at a charge of $30, payable by non-shareholders and shareholders alike (shipping included).  In 1999, the printed set became a three-volume issue and the charge was raised to $35 for all.

Those printed volumes have not been available for several years (and I feel lucky to have some in my library). That’s been a relief to staff at Berkshire’s famously minimalist headquarters, a handful of people with no time to process payments and stuff envelopes.  It is this lacuna that Max Olson’s alternative fills, a good job, especially at the price of $24.50 (plus shipping). Read the rest of this post »

  May 10, 2013 at 1:14 pm   Posted in: Book Reviews   Print This Post   No Comments

Deep Dive in Prawf Lateral Market Confirmed

posted by Lawrence Cunningham

As anticipated (here and here), 2013 witnessed a deep dive in lateral recruiting by law schools and movements by law professors.

Only 41 schools secured recruits, which totaled 56 prawfs, according to the latest information reported at the Faculty Lounge.

Compare similar information reported since 2006  in the following table.  (Obviously, FL may have missed some results, so the data are not necessarily complete, but that is true for 2013 as well as any prior year.)

Year	Schools	Faculty
2006	71	132
2007	72	131
2008	80	136
2009	68	114
2010	72	92
2011	55	93
2012	56	84
2013	41	56

  May 6, 2013 at 4:03 pm   Posted in: Law School (Hiring & Laterals)   Print This Post   2 Comments

Notes on Berkshire’s 2013 Annual Meeting

posted by Lawrence Cunningham

Spent the weekend in Omaha with my wife at the Berkshire Hathaway shareholders’ meeting, one of many I’ve attended since my first in 1998 after publishing The Essays of Warren Buffett: Lessons for Corporate America.  The pace is always busy and has gotten hectic as I’ve gotten to know more people and the scale and size of the meeting expands.

For us, this meant, besides the meeting, which takes place from about 9 to 4 on Saturday, various interviews (Yahoo! Finance Friday, USA Today Saturday afternoon and Motley Fool Saturday evening); book signings (conference at U. Nebraska Friday evening, the Bookworm Sunday early afternoon and Hudson Books later Sunday); and social gatherings (a party given by hedge fund manager Whitney Tilson Friday evening and Warren Buffett’s brunch for out of town friends on Sunday).

The result was catching up with scores of people I know through this world, including both luminaries and students, those I’ve known for decades and those I’ve gotten to know more recently.  One comes away with reflections, during such occasions, and herewith a few of mine. Read the rest of this post »

  May 6, 2013 at 2:13 pm   Posted in: Current Events   Print This Post   2 Comments

The Reality of Short Termism Per Mark Roe

posted by Lawrence Cunningham

Short-termism in stock markets preoccupies many policy makers and analysts of late but Mark Roe wonders about the validity of some of the conventional talk.   He has posted a series of three short articles on the topic excerpted from a larger project, all worth a look: (1) about whether the cause of any new corporate short-termism may not be stock markets but the speed of change in business pressures;  (2) Are Stock Markets Really Becoming More Short-Term?, and (3) Apple’s Cash Flow Problem, using that case to question the assumption of short-termism.   Business Lawyer will publish the longer version of the inquiry this summer in Mark’s piece, Corporate Short-termism — In the Boardroom and in the Courtroom.  All worth reading.

  May 6, 2013 at 9:44 am   Posted in: Corporate Law, Current Events   Print This Post   No Comments

Prof. Bainbridge on Hess: Critics Still Not There Yet

posted by Lawrence Cunningham

Prof. Steve Bainbridge replied to my post about shareholders paying bonuses to director nominees elected in contested elections, highlighted by the pending proxy battle at Hess.  Steve clarifies his objection to Elliott Associates, the activist shareholder hedge fund, promising to pay its director nominees bonuses if Hess’s stock price outperforms a group of industry peers over the next 3 years:

When I described these transactions as involving a conflict of interest, what I had in mind was the general conflict of interest ban contained in Restatement (Second) of Agency sec 388:  ”Unless otherwise agreed, an agent who makes a profit in connection with transactions conducted by him on behalf of the principal is under a duty to give such profit to the principal.”  Surely the hedge fund payments here qualify as, for example, the sort of gratuties picked up by comment b to sec 388:

“An agent can properly retain gratuities received on account of the principal’s business if, because of custom or otherwise, an agreement to this effect is found. Except in such a case, the receipt and retention of a gratuity by an agent from a party with interests adverse to those of the principal is evidence that the agent is committing a breach of duty to the principal by not acting in his interests.  Illustration 4.   A, the purchasing agent for the P railroad, purchases honestly and for a fair price fifty trucks from T, who is going out of business. In gratitude for A’s favorable action and without ulterior motive or agreement, T makes A a gift of a car. A holds the automobile as a constructive trustee for P, although A is not otherwise liable to P.”

How is the hedge fund’s gratitude for good service by the Hess director any different than T gift to A?  To be sure, directors are not agent of the corporation, but “The relationship between a corporation and its directors is similar to that of agency, and directors possess the same rights and are subject to the same duties as other agents.” . . . Thus, I believe, even if the hedge fund nominee/tippees are scrupulously honest in not sharing confidential information with the funds, put the interests of all shareholders ahead of those of just the hedge funds, and so on, there would still be a serious conflict of interest here.

I can offer 4 replies to Steve’s fine legal points, which I’ll first summarize and then elaborate:

1.  While Steve acknowledges that agency law doesn’t apply, he stresses similarities between agency and corporate law when justifying reference to the American Law Institute’s Restatement (Second) of Agency, but then omits the differences that warrant treating directors differently than agents.

2. Even accepting arguendo Steve’s proposal to rely on the Restatement (Second) of Agency,  he chose to present Illustration 4 as governing the Elliott-Hess arrangement, but the next one, Illustration 5 (excerpted below), is more on point and comes out the other way because the agent and principal are free to agree otherwise.

3.  Even if agency law applied, the Restatement (Second) of Agency, initially adopted in 1958, was superseded in 2006 by the Restatement (Third) of Agency, whose provisions support the Elliott-Hess arrangements.

4.  But agency law doesn’t apply.  The ALI’s applicable standard from corporate law is stated in its Principles of Corporate Governance, expressly referenced in the Restatement (Third) of Agency.  This standard puts the burden on those challenging such arrangements to prove defects such as unfairness or secretiveness, which opponents have not done.  Read the rest of this post »

  May 4, 2013 at 5:44 pm   Posted in: Agency Law, Corporate Law, Current Events   Print This Post   4 Comments

posted by Lawrence Cunningham

USA Today’s Matt Krantz quoting me on Warren Buffett joining Twitter.  (LAC)

  May 2, 2013 at 4:17 pm   Posted in: Asides   Print This Post   No Comments

Buffett’s Flock and Berkshire’s Future

posted by Lawrence Cunningham

Forty-thousand investors, including me, descend on Omaha, Nebraska this weekend for the annual meeting of Berkshire Hathaway Inc., the company Warren Buffett has run for nearly forty years. Many will be asking a proverbial question: “What happens to Berkshire if Buffett gets hit by a truck?” It used to be a genuine concern that the fate of the man and the company he built and controlled were one: with Buffett’s demise went Berkshire.

But after two decades of intensive definition, by words, deeds and training, Buffett has institutionalized Berkshire’s unique culture, methods and processes to a point where it most likely will endure long after Buffett departs.  Joe Nocera captured a distinctive point about this when recommending that President Obama read my book, The Essays of Warren Buffett: Lessons for Corporate America:  Buffett’s rules of investing are rules to live by, which explains why Berkshire’s shareholders’ meeting, unusual among large companies, draws a large number of shareholders.

Berkshire shareholders know that Buffett, an octogenarian, and the Berkshire board, have formalized a succession plan. It involves splitting Buffett’s job between managing and investing. They have identified and recruited particular people for the two roles. The choices have been kept confidential, but an important job has been done in finding and positioning the most capable successors prepared to accept the challenge of filling some very big shoes.

No succession plan, however, can provide for another consequence of Buffett’s departure, which is the disappearance of an unusual ownership structure. Buffett has always been Berkshire’s controlling shareholder, lately with about 1/4 of the voting power, always representing 99% of his net worth.  He has been gradually reducing his stake by regular annual transfers to the Gates Foundation, a process that will accelerate in coming years and after his death.

The company will thereafter lack a controlling shareholder, which has been an important strength, because Buffett’s word has been his bond. Nevertheless, there are philosophical, operational and strategic considerations which give Berkshire institutional autonomy, endowing it as an organizational machine larger than one human being and greater than the ownership feature of a controlling shareholder.   Read the rest of this post »

  May 2, 2013 at 1:27 pm   Posted in: Current Events   Print This Post   No Comments

Director Bonuses for Performance, Prawf Debate and the Bigger Picture for Hess

posted by Lawrence Cunningham

A hot debate rages among corporate law professors amid one of the largest proxy battles in a decade: Hess Corp., the $20 billion oil giant, is the focus of a contest between its longstanding incumbent management and the activist shareholder Elliott Associates.   Ahead of Hess’s annual meeting on May 16, where 1/3 of the seats on Hess’s staggered board are up, antagonists offer dueling business visions.  They battle bitterly over such fundamentals as sectors to pursue, degrees of integration to have and cash dividend policy.

The professorial debate, more civil, is about a novel pay plan Elliott proposes for its director nominees, which Hess’s incumbents condemn and Elliott defends as suited to shareholders. On one side, all quoted in Elliott’s investor materials circulated April 16, are me, Larry Hammermesh (Widener), Todd Henderson (Chicago), Yair Listoken (Yale) and Randall Thomas (Vanderbilt); on the other  Steve Bainbridge (UCLA), Jack Coffee (Columbia) and Usha Rodriques (Georgia), all of whom have blogged since the matter was first reported by Steven Davidoff (Ohio State) in the New York Times April 2 (for which he connected with me for comment).

As in all such cases, Elliott proposes to pay nominees a flat fee of $50,000 each for their troubles and to indemnify them for legal liability.  The novelty is that Elliott will provide incentive compensation to the group: if any Elliott nominee is elected as a result of this year’s  contest, all nominees receive a bonus at the end of three years if Hess’s stock performs better than a group of industry peers. Elliott, not Hess, pays all bonuses.

Hess incumbents portray the bonuses as objectionable (and Steve, Jack and Usha agree). Incumbents say they give nominees incentives to maximize short-term shareholder value rather than serve as long-term stewards.   They say the pay somehow makes the directors beholden only to Elliott, preventing the exercise of business judgment for the benefit of the corporation and its shareholders as a whole.

I have taken a different view, set out in Elliott’s materials last month (p. 148):  The bonuses seem surgically tailored to tie the payoff to Hess’s stock price performance compared to competitors. That is intended to align the interests of those directors with those of the company’s shareholders.  Elliott makes the promise at the outset and then has no role to play afterwards, other than to pay up if milestones are met.  No one is beholden to Elliott and the independence of those directors is not compromised.  There is no incentive to liquidate the company or concentrate on the short term but every incentive to manage to outperform peer company stock price performance over three years.

Read the rest of this post »

  May 1, 2013 at 7:41 pm  Tags: Corporate Law  Posted in: Corporate Law, Current Events   Print This Post   No Comments

Introducing Kelli Alces

posted by Lawrence Cunningham

We are delighted to welcome Kelli Alces as a guest blogger here at Concurring Opinions for the month of May.

Kelli is the Loula Fuller and Dan Myers Professor of Law at Florida State University where she specializes in corporate law. Her scholarship has addressed corporate governance in bankruptcy, corporate fiduciary duties, shareholder representation and executive compensation.  She has done particularly pioneering work concerning the role and reasons for the board of directors.

Kelli has been a visiting professor at George Mason University, University of Iowa and the University of Richmond.  She graduated from the College of William & Mary and earned her J.D. from the University of Illinois.  Before entering the academy, she was an associate of Gardner, Carton & Douglas in Chicago.   Some highlights of her outstanding scholarship, mostly available on SSRN here, follows:

Legal Diversification (forthcoming Columbia L. Rev. 2013)

The False Promise of Risk-Reducing Incentive Pay (J. Corp. L. 2012) (with Brian Galle)

Beyond the Board of Directors (Wake Forest L. Rev. 2011)

The Equity Trustee (Arizona St. L. J. 2010)

Debunking the Corporate Fiduciary Myth (J. Corp. L. 2009)

Directors’ Duties in Failing Firms (with the late Larry Ribstein) (2007)

Welcome Kelli!

  April 30, 2013 at 3:25 pm   Posted in: Uncategorized   Print This Post   One Comment

Ralph Lauren’s Deal with SEC and DOJ

posted by Lawrence Cunningham

Ralph Lauren Corp.’s mid-level executives discovered that a few line employees in Argentina had bribed local officials. That enabled importing of the company’s clothing products without the necessary paperwork or inspection.  The bribes, paid from 2005 to 2009, ran to $593,000.

Bribing foreign officials is a US federal crime, whether or not the action is a crime under foreign law.  A routine internal corporate review of controls and compliance programs by Lauren managers uncovered the employee actions.  The corporate response was swift, a textbook exercise in corporate crisis management.

A prompt investigation was conducted, involving translation and examination of documents and interviews of witnesses.  It resulted in dismissal of several employees and recommendations for internal governance reforms that included new reporting protocols and training programs.

Within two weeks of the discovery, Lauren provided the resulting full report  to US federal authorities, including the Securities and Exchange Commission and Department of Justice, accompanied by the documentary record.  (The company then went further: terminating operations in Argentina and conducting a worldwide review of compliance and training programs.)

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  April 26, 2013 at 8:18 am   Posted in: Uncategorized   Print This Post   No Comments

Ed de Grazia, RIP

posted by Lawrence Cunningham

RIP to Ed de Grazia, my 1L Criminal Law teacher and later colleague at Cardozo for a decade,  who passed away at the age of 86.  As the NYT puts it today, Ed was a “fierce civil libertarian.”

Landmarks of his outstanding career as a lawyer who opposed government censorship include his 1964 SCOTUS victory on behalf of the publisher of Henry Miller’s sexually explicit book Tropic of Cancer.  Ed’s own 1994 book, Girls Lean Back Everywhere, was a stirring defense of artistic freedom against state power.

Ed, who spent most of his career at Cardozo with shorter stints at Catholic, Connecticut, Georgetown and Yale, was an impressive teacher.  He presented material and led students through discussion with total objectivity, with no assumptions  or pre-judgments.

He insisted that we students explain why any given alleged behavior violated a particular criminal law.  That went as much for arson, burglary, and homicide as it did for cannibalism, incest and necrophilia.  Ed’s method was demanding, leading a class that sharpened legal minds.  He also taught a special seminar as part of Cardozo’s prosecutor internship program where his pedagogy and philosophy instilled a deep sense of obligation to think and explain rather than blindly pursue and enforce.

Ed was also a passionate proponent of privacy before the modern era developed such an intense interest in the topic.  For example, as the NYT notes today, Ed argued that newspapers had no business reporting on the romances of political figures, such as Gary Hart’s  affair with Donna Rice that doomed his political career.  Ed preferred not to judge his fellow human beings, leaving that to the inner tribunal of the conscience and above all keeping the state’s role in people’s lives as limited as possible.

Ed was also a great colleague for the same reasons: he welcomed all forms and manner of scholarly inquiry and loved learning about why any one of us found our subject so interesting.  Ed was cool, smart and earnest. We will all miss him but always remember his spirit.

  April 24, 2013 at 8:35 am   Posted in: Administrative Announcements, Teaching   Print This Post   No Comments

Today’s Stock Market Bubble: Mr. Market Is Alive and Still Unwell

posted by Lawrence Cunningham

The stock market rallies while recession continues to plague America. Chief executives worry, companies hoard cash, uncertainty haunts our banking system. Gas prices are up, GDP growth is down, unemployment is up, government debt and size are up and political leaders do not show the ability to come to grips with any of it.

Yet the Dow Jones Industrial Average, heading for 15,0000, exceeds levels not seen since October 2007, a few months before the current crisis showed up.  Believers in the efficiency of stock markets will take this as a sign of good times ahead, believing that markets reveal better than anything else the truth about business fundamentals.  Skeptics will plan to cite this as the first sign of a bubble.  Which view is the more plausible?

Believers in stock market efficiency buy the revolutionary ideas, hatched during the past 50 years, called modern finance theory.  This elaborate theory boils down to the notion that the best estimate of the value of a stock is its prevailing market price. The practical implication, of course, is that it is a waste of time to study individual investment opportunities in public securities. According to this view, you will do better by randomly selecting a group of stocks for a portfolio by throwing darts at the stock tables than by thinking about whether individual investment opportunities make sense.

Reverence for these ideas is not limited to ivory tower academics, but became standard dogma throughout financial America, from Wall Street to Main Street. Many professionals still believe that stock market prices always accurately reflect fundamental values, that the only risk that matters is the volatility of prices, and that the best way to manage that risk is to invest in a diversified group of stocks.

But a distinguished line of investors stretching back to Ben Graham and forward to Warren Buffett challenges such dogma by logic and experience.  Graham preached, and Buffett has successfully practiced, a different approach. Graham, who taught at Columbia Business School in the 1950s and ran an investment partnership, wrote a number of classic works, including The Intelligent Investor. There Graham argued that price is what you pay and value is what you get. These two things are rarely identical, but most people rarely notice any difference, he believed.

Read the rest of this post »

  April 19, 2013 at 11:56 am   Posted in: Corporate Finance   Print This Post   One Comment

Call for Papers: National Business Law Scholars Conference

posted by Lawrence Cunningham

I am delighted to pass along the following notice from the organizers of the National Business Law Scholars Conference.  I’m also honored to report that they have asked me to deliver the keynote at this year’s conference, and I look forward to doing so.  

Deadline Extended to May 31

We have received an enthusiastic response to the Call for Papers for the National Business Law Scholars Conference, scheduled for June 12-13, at The Ohio State University School of Law.  We will have additional openings for anyone who would like to make a presentation but has not yet responded.  Thus, we have extended the deadline to MAY 31st.  See the Call for Papers, re-posted below with the extended deadline date, for details on how to submit:

National Business Law Scholars Conference: Call-for-Papers

The National Business Law Scholars Conference (NBLSC)  will be held on Wednesday, June 12th and Thursday, June 13th at The Ohio State University Michael E. Moritz College of Law in Columbus, Ohio.  This is the fourth annual meeting of the NBLSC, a conference which annually draws together dozens of legal scholars from across the United States and around the world.  We welcome all on-topic submissions and will attempt to provide the opportunity for everyone to actively participate.  Junior scholars and those considering entering the legal academy are especially encouraged to participate.

To submit a presentation, email Professor Eric C. Chaffee at echaffee1@udayton.edu with an abstract or paper by MAY 31, 2013.  Please title the email “NBLSC Submission – {Name}”.  If you would like to attend, but not present, email Professor Chaffee with an email entitled “NBLSC Attendance”.  Please specify in your email whether you are willing to serve as a commentator or moderator.  A conference schedule will be circulated in late May.

Conference Organizers:

Barbara Black (University of Cincinnati)
Eric C. Chaffee (University of Dayton)
Steven M. Davidoff (The Ohio State University)

  April 17, 2013 at 9:56 am   Posted in: Accounting, Administrative Announcements, Conferences, Corporate Finance, Corporate Law, Securities, Securities Regulation   Print This Post   No Comments

posted by Lawrence Cunningham

Berkshire Hathaway is bigger than Warren Buffett.  Manual of Ideas (LAC).

  April 15, 2013 at 9:47 am   Posted in: Asides   Print This Post   No Comments

Publicity and Illegality in Organizations

posted by Lawrence Cunningham

“Corporations do not commit crimes, people do,” would be a good thing for everyone to remember but those who like to vilify the corporation too readily forget.  A valuable new research paper canvasses much of the literature about wrongdoing by people in corporations. Rosa Abrantes-Metz and Danny Sokol focus on cartels that violate antitrust laws, shifting the lens from the firm level to those within a corporation and offering a broader review of screens useful to combat illegality.  It’s a great contribution to and synthesis of the literature.  

I will draw on its lessons as I revise the current edition of my accounting textbook written for use in law schools, as well as to reflect on the corporate governance aspects of this problem, addressed in several important passages of my collection of Warren Buffett’s letters to constituents of Berkshire Hathaway.

Buffett’s writings address the tone at the top and promoting a culture of compliance. As CEO, he sends a biannual letter to his managers emphasizing that the most important job of every one of Berkshire Hathaway’s 300,000 employees is preserving Berkshire’s reputation.  For 25 years, that memo has included some version of this sentence:  ”We can afford to lose money, even a lot of money, but we can’t afford to lose reputation, even a shred of reputation.”

Another point he repeats will be of special interest to lawyers among our readership.  He says it is not enough to comply with the law or letter of law. Berkshire must apply a stricter test, called the New York Times test: we would be happy to have all our activities written up on the front page of a national newspaper in an article written by an unfriendly reporter.  It is a much more poignant test than whether you comply with a particular antitrust law or accounting principle.

I call the toughest battle to fight concerning compliance the disease of the crowd. A common defense of sketchy behavior is that everyone else is doing it.  In that letter, Buffett explains that such a  response is usually an excuse rather than a reason. If so, the action probably should be avoided.  To implement such a policy, Buffett offers  senior managers a hotline to him directly if they detect even a whiff of dubious behavior. Those managers pass that message down the ranks and establish parallel hotlines from their troops to them.

Above all, once wrongdoing is detected, swift and public action is required. The worst thing managers can do when they discover illegalities by their employees is try to hide it.  In America, people are very forgiving of substantive errors or even wrongs. They are relentlessly unforgiving of attempts at evasion, duplicity, or hiding things.  (“It’s the cover up, stupid.”) Although Jonathan Macey has recently released an interesting book lamenting the decline of reputation as the constraint portrayed in economic models, it remains a powerful force.  Read the rest of this post »

  April 12, 2013 at 10:39 am   Posted in: Accounting, Corporate Law   Print This Post   No Comments

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