Warren BuffettÃ¢â‚¬â„¢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 Ã¢â‚¬Å“a CEO must not delegate risk controlÃ¢â‚¬ 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 heÃ¢â‚¬â„¢s incapable of handling that job, he should look for other employment. And if he fails at it Ã¢â‚¬“ with the government thereupon required to step in with funds or guarantees Ã¢â‚¬“ the financial consequences for him and his board should be severe.Ã¢â‚¬
Buffet goes on to note that it has not been shareholders who have botched the operations of some of the countryÃ¢â‚¬â„¢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 Ã¢â‚¬“ 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 Ã¢â‚¬“ one not reimbursable by the companies theyÃ¢â‚¬â„¢ve damaged nor by insurance.Ã¢â‚¬
Before sounding the death knell for directors and officers liability insuranceÃ‚ (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 officialsÃ¢â‚¬â„¢ misconduct has necessitated a government bailout. What do you think?