Auditing An OracleBy Mel Duvall | Posted 2003-08-01 Email Print
Shareholders nearly deify Warren Buffett for the way he manages his diverse holding company, Berkshire Hathaway of Omaha.
The Oracle of Omaha was in classic form in early May, at his affectionately dubbed "Wood-stock for Capitalists." For three days of worship, 15,000 Berkshire Hathaway shareholders had come to Nebraska to hear Warren Buffett's wisdom on how to place trust and invest money in American companies.
Pausing occasionally for a swig of Cherry Coke, the sharp-witted 72-year-old blasted the lowlifes and criminals who have been unearthed like mealy bugs after a summer storm. "It prevails in almost every place," said Buffett in his no-nonsense style. "And unless there is a countervailing force, it is hard to stop."
He was, of course, referring to the ugly behavior of chief executives, financial officers and other managers of some of the largest U.S. companies. From phony accounting to "obscene" paychecks, Buffett left no doubt that the conduct of corporate America had reached its lowest point in his half-century of investing.
"What we really deplore are the attempts by corporations to solve operating problems with accounting maneuvers," he said in response to shareholders' questions. "It catches up with you, sometimes with disastrous results. You might as well face reality immediately."
Buffett's criticisms carry extra weight because Berkshire Hathaway has become a beacon for good corporate governance. Shareholder groups and regulators alike have turned to Buffett for guidance on how to right an industry stuck in a morass of scandals. As recently as two years ago, the so-called sage was chastised for failing to invest in Internet companies because he couldn't understand their business plans or underlying value. Today, his concerns look prophetic.
"Buffett is probably more honest than you or I," said Jack Putnak, a 37-year-old investor from Charleroi, Pa., who arranged a two-week vacation in Omaha around the shareholders' meeting. Putnak based his faith on Buffett's practice of paying himself a nominal $100,000 salary and his aw-shucks way of heaping praise on managers while accepting blame for Berkshire's mistakes.
Yet, while he may be prophetic, Buffett is not quite the gold standard of good corporate governance his followers hold him up to be. For Buffett, it's often a "do as I say, not as I do," approach to management. He cuts deals without following accepted rules for due diligence, gives Berkshire managers such loose reins that they are able to pile up losses for years before he will take action, and eschews many of the rules and technologies companies are deploying to get a firmer grip on financial reporting.
"There's a difference between how they manage themselves and what they look for in companies they manage," observes George Dallas, managing director of governance services at Standard & Poor's in London.
He, on the other hand, cuts deals based on gut instinct and without common due diligence such as getting an outside audit. The latest: During two hours in May, he sealed the $1.5 billion purchase of Wal-Mart's distributor, McLane Co.
"I literally shook hands and was done," he told reporters. "There was no due diligence."
"Too often I was silent when management made proposals that I judged to be counter to the interests of shareholders."