Monday, September 1, 2008

From Buffett's Basket: Corporate Governance Part I

From Buffetts' Basket is a series of posts that will highlight key ideas from "The Essays of Warren Buffett" as I understand them. Italicized portions are not taken from the essays but rather represent my own comments, thoughts and questions on the subject.

On the topic of corporate governance Buffett writes that full and fair disclosure is something he expects to receive as a shareholder of a public corporation. He expects clear financial disclosure with adequate management discussion on pertinent business matters. If this standard is not met, he becomes suspicious of management's intentions. Buffett feels that all shareholders are entitled to receiving company disclosure information at the same time (or as close as possible). He rejects the idea of preferential information flows to certain shareholders. He also doesn't want to read a personal relations spin on company addresses, but would rather have the CEO address the issues in a clear and concise manner. Buffett's ability to read management is legendary, perhaps part of his read on management comes from observing the directness, or lack thereof that management takes in addressing shareholders through the annual reports and when tough issues arise with the company?

Buffett also feels that management should resist against requests to provide estimates of expected company growth rates. He feels that these predictions often are too lofty, aren't accompanied with the appropriate caveats and can lead the CEO to destructive behaviour in striving to meet targets they had announced. Sometimes, CEOs engage in playing accounting games to meet their numbers and these actions can snowball out of control, sometimes leading to fraud. It's interesting that Ben Graham (Buffett's mentor) writes a lot about the dangers of forecasting earnings in valuations because it is extremely difficult to get the forecasts right. What comes to mind in this note, is that Buffett wishes management would realize the inherent problems with forecasting. Perhaps this is another test that Buffett applies to judge the quality of management.

No comments:

Follow by Email