Buffett on CEOs and Risk Management

Warren Buffett’s annual letter to Berkshire Hathaway shareholders, released this past Saturday February 27, had some stern words for senior executives of financial institutions mired in the financial crisis and their reliance on insurance coverage. After stating that “a CEO must not delegate risk control† the Oracle of Omaha observed:

In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other employment. And if he fails at it – with the government thereupon required to step in with funds or guarantees – the financial consequences for him and his board should be severe.†

Buffet goes on to note that it has not been shareholders who have botched the operations of some of the country’s largest financial institutions, yet they have borne the burden, with 90 percent or more of the value of their holdings wiped out in most cases of failure. Meanwhile, the CEOs and directors of the failed companies have largely gone unscathed.

Then comes the line that will send corporate leaders everywhere running for cover – literally:

It is the behavior of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price – one not reimbursable by the companies they’ve damaged nor by insurance.†

Before sounding the death knell for directors and officers liability insurance  (D&O), fellow blogger Kevin LaCroix over at the D&O blog reassures us that Buffett is not necessarily suggesting that indemnification and insurance are never appropriate for corporate officials, but perhaps only when the officials’ misconduct has necessitated a government bailout. What do you think?

One thought on “Buffett on CEOs and Risk Management”

  1. The language of these excerpts conveys to me, albeit subtly, that federal regulation is the looked-for solution, rather than hiring discretion on an individual-company basis. That’s a bit chilling and misdirected, I believe.

    I do agree that our CEO’s behaviour is what needs to change, however, and perhaps the same may be said for the culture of investment in this day and age, a culture which appears to favour short-term, high-yield action: get it, cash out, retire after 25 years. I recall reading that because financial professionals often retire as young as they do, there is a paucity of experience in the industry, as though all the history of finance existed of nothing more than the 80s and onward (several singular economic periods).

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