Two questions from "Essays of Warren Buffett"
Hi everyone.
I was just reading this book and came across two points which i didn't understand.
1. Cunningham says: "First, standards for measuring a CEO's performance are inadequate or easy to manipulate, so a CEO's performance is harder to measure than that of most workers. Second, no one is senior to the CEO, so no senior person's performance can be measured either"
I understood the first part about CEO's results being harder to measure. However, the second point did not make sense to me. How does nobody being senior to the CEO lead to the inability to measure other senior person's performance?
2. After describing problems arising from a corporation without a controlling shareholder, Buffett says "the strongest weapon a director can wield in these situations remains his or her threat to resign".
How would the resignation of a director affect the management of the company? The only way I could think of is if the director sells his shares when he resigns, sending the stock price down.
Appreciate your inputs on these!
If no one is senior to the CEO, then there's no higher/senior authority beyond the CEO to measure himher up.
If a Director resigns, or if there's upheaval /lack of direction within the Board, it will stress out the stock price, too. Bill Ackman resigned from JCPs Board http://www.reuters.com/article/2013/08/13/us-jcpenney-ackman-idUSBRE97C… today after pushing for changes for two years.
Regarding your first question – I’d seen that passage before (it is a foreward by Prof. Lawrence Cunningham at GWU Law School, see here http://blogs.law.harvard.edu/corpgov/2013/03/29/governance-buffett-styl…) and also found it hard to read. Basically what he’s saying is that the CEO’s performance is hard enough to measure because there’s no employee that’s senior to him, and what compounds the issue is really the absence of any employee that oversees the CEO. That’s why it’s so important to look for a company that has proper corporate governance and board to act as a series of checks and balances and protect the interest of shareholders. The issue is that in many cases, the CEO also has some real influence on the board so it’s hard to extricate the effect of any biased relationships or conflicts of interest. Therefore, prudent investors would take a look at a company’s board and figure out how shareholder-friendly it is (i.e. are most of the directors independent, are there few anti-takeover defenses, have most of the board members had lots of industry experience and don’t have consulting or other business-related dealings with the company, etc.)
Regarding your second point, generally the resignation of a director without reasonable cause is a concern. Of course, most people don’t even bother to look at these 8-K’s or proxy filings so they don’t know. However, this is not uncommon with scandalous companies - board members just don’t want to get embroiled in that sort of thing, but also realize that whistle-blowing could jeopardize their sleeve of options or deferred stock units – so the best thing to do is for them to leave gracefully. However, prudent investors will pay attention to turnover in the board of directors. If it’s a good company on the up-and-up, there’s really no reason why directors would want to resign unless they had some personal issues because in these cases, their compensation packages would likely go up in value.
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