Woodstock for Capitalists Revisited


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 Expert Perspective by Grahall’s OmniMedia Editorial Board

The Berkshire Hathaway Annual Meeting, held on May 2, 2009, is reported to have met expectations on all fronts:  entertaining, folksy, touching and of course informative.  The meeting this year was attended by more than 35,00 people which might attest to the interest that people have in Buffet’s investing style, in Berkshire Hathaway itself, or perhaps it might speak to the reach of eBay, where Berkshire Hathaway was selling admission passes to the public for $5 a piece.

The Q&A section of the meeting was changed this year.  In the past all questions came from the audience.  This year shareholders were asked to submit questions to three BHK approved journalists who then selected questions from those submitted. By some accounts over 5000 questions were submitted to journalists. Journalists alternated questions e-mailed by shareholders with those posed by shareholders in attendance at the meeting.   The Q&A session began at about 9:30 AM and ended at 3:00 PM. 

Although we didn’t attend the meeting, we reviewed several summaries.  Our interest was what Buffett and Munger had to say on executive pay and board governance.  From our review of the summaries, it appears there were two questions along these lines.  One has received some significant media attention quoting Buffett as saying that the best way to reign in compensation packages is to embarrass the executive receiving them. (Link to the article in Market Watch.) 

No doubt Buffett’s thinking here was well intentioned, but unfortunately it is also impractical or maybe just “wrong headed”.  Months of harsh media attention and public outcry have yet to “embarrass” greedy CEO’s into unilaterally reducing their pay packages.   In fact, we are just as likely to see an article in the media about continuing executive compensation excesses as we are about the public outrage against it. CEO’s are notoriously thick skinned.  They didn’t get to the top of their game by being pushovers.  A 2005 study by John E. Core, Wayne Guay, and David F. Larcker of the Wharton School at the University of Pennsylvania looked at 15,000 negative press articles about CEO pay from 1994 to 2002 and concludes that negative press did not result in changes to pay.  It didn’t work then and it certainly doesn’t seem to be working now. (An interesting side note: in that study, Buffett made the “top 10 List” of CEO receiving the most negative articles.)

Moving on to the subject of board governance and board pay, earlier in the Q&A session, there was a question pertaining to what a fair compensation package would be for a subsidiary in an capital intensive business assuming that incentive bias caused some of the problems for financial institutions. This question began a discussion by Buffett and Charlie Munger that laid a large amount of the blame for the CEO pay excesses firmly on Boards of Directors.  Buffett said, “Truth is that the Board has little affect on compensation, the CEO basically sets his own package.” Buffett shared that Boards have done very little thinking about how to best pay CEOs.  Buffet and Munger would eliminate the Compensation Committee, and Munger voiced concern that liberal pay to directors is counter-productive, as it results is a situation where they cannot be independent. 

Those last points made by Buffett and Munger resulted in wide-ranging discussion among Grahall consultants touching on topics as disparate as “class warfare” and supply-side vs demand-side economics.  Following is an attempt to coalesce, connect and summarize Grahall’s discussion.  

Unemployment is expected to peak near 10% putting 5 million people out of work. Salaried workers, on average, have cash reserves to last about 3 months, hourly workers’ cash reserve are only about 1 month.  Unemployment insurance won’t cover all expenses, and once credit is maxed out (if it isn’t already), what are these unemployed people to do, go rob a bank? With a two to three year horizon for economic recovery it’s no surprise that the general public is aghast at what they see as excessive pay for executives.  When the public becomes aware of the complicity on the part of Boards of Directors in these excesses, Directors’ heads will be next on the chopping block of public opinion.  But should Directors work for free?   While we have heard Directors say they “don’t do it for the money”, we have never heard a Director say they would do it WITHOUT the money.  And for that matter, we would be hard pressed to find a situation where NOT paying people improved results.  There is a value in Directors’ knowledge, experience, time, and most importantly stewardship and they should be paid for that, just like anyone else (assuming Directors are functioning as stewards and not “yes men and women”). 

Although we don’t believe that negative press or public outrage will do much to change compensation practices, it is possible that large institutional investors will be able to apply significant pressure and the government will be able construct meaningful regulations to curb excessive pay.   And if executives and directors (certainly among the most highly paid people in the country) find their pay scaled back “excessively” perhaps we can justify that the same way our parents did when they punished us “unfairly” saying “I’m sure there’s something you did to deserve the punishment that I’ve missed…”   Will there be out and out class warfare?  Well, perhaps there will be warfare of this kind: blitzkriegs of negative publicity increasing public awareness, battalions of consumers making spending decisions based on executive compensation, and institutional investors wielding the powerful sword of social investing.

Now more than ever we need leadership not self-interest, (although a contrarian could argue that is in a leader’s best self-interest to demonstrate leadership), to help companies remain, renew or restore their viability. When leaders don’t lead (and seem not to care about anything but themselves) it can result in ambivalence and lack of motivation on the part of employees.  Even growing unemployment can be a symptom of this leadership gap.  If leader don’t lead, employee won’t have much work to do and job losses will happen.  Given the choice of where to work and where to invest time, most people would pick the place with good leadership, knowing their jobs, if done well, will be more secure.  Leadership is just one dimension of organizational success and performance, but is the keystone.  It tends to define or frame the other dimensions including values, rewards, competencies, work processes, management processes, innovation and job design.

To a great extent innovation without appropriate risk management got us into the economic problems we face now. But which came first?  Was it the demand for unrealistically cheap mortgages coupled with the demand for easy credit that, once the products were in place, drove a boom in home buying, a chicken in every pot and a foreclosure notice in the mail when the bottom dropped out of the market?  Or was it supply of cheap (but in hindsight screamingly risky products) that lured unsuspecting consumers and investors with false claims?   The prevailing opinion seems to be that the bad products were “supply side” driven by greedy Wall Street executives who designed them first and then pushed them into the market to create demand, But let’s look at the other side, the consumer side, of the equation.  Could it be that the demands of the “gimme generation” led to the meltdown. Did the market demand for easy money drive innovators ahead into uncharted territory (and risk managers to bury their heads in the sand)?

So where exactly does personal responsibility come into play here.  Let’s look around.  We have out of work college educated 20-somethings with staggering college loans topped off with a mountain of credit card debt complaining that it was the credit card company’s fault for their problems because it was “too easy” to get in trouble.  We have homebuyers who with easy credit got into homes far beyond their ability to afford and are now facing foreclosure.  We have financial services executives paying bonuses after accepting TARP money.  We have “independent” directors who shareholders expect to take the equivalent of the Hippocratic oath to look out for shareholders’ best interest and yet the directors permit executive demands and perhaps their own compensation to cloud their judgment. 

It’s time to stop and take stock. We are each responsible for our own actions and need to consider the consequences of them beyond our short-term gain or needs.  Contact Grahall, we might not be able to fix the economy single handedly, but we can help your company design a rewards strategy for executive, boards and employees that help drive business strategy and enhance your company performance.


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  • [...] economic meltdown started as supply side or a demand side economics isn’t really the issue.  (Read Grahall’s Expert Opinion on this).  The real issue is what do we do with perfect hindsight and limited foresight to make things [...]
  • [...] picturing this huge Wall Street conspiracy to steal from the world. As we suggested in our blog Woodstock for Capitalists Revisited, Wall Street created derivative products that the market said it needed and only a supply-sider can [...]

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