Warren Buffett, the iconic billionaire investor and chairman of Berkshire Hathaway /zigman2/quotes/208872451/composite BRK.A +0.58% /zigman2/quotes/200060694/composite BRK.B +0.26% , recently released his latest letter to shareholders.
You probably didn’t hear a lot about it, not least of all because the stock market has been generating plenty of news on its own lately thanks to reaction to the coronavirus .
It’s still very much worth your time to read and absorb Buffett’s undeniable wisdom. For instance, he spends a fair amount of his space in this year’s letter talking about company directors and how to hire them. Now, this is not something investors think much about. But Buffett’s point is worth a deeper look — as is applying that wisdom to your overall investment thinking.
The problem, Buffett explains , is that company directors primarily are motivated by the money they make to sit on boards. Meanwhile, CEOs are motivated to find directors who will not challenge their decisions, especially about their own compensation.
“When seeking directors, CEOs don’t look for pit bulls. It’s the cocker spaniel that gets taken home,” Buffett writes.
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That’s a built-in conflict of interest, one that serves the board and the management but not shareholders. Buffett argues that Berkshire and its many units work hard to avoid this conflict trap.
Dancing with the stars
He then goes on to make a key point about expertise and titles. In short, just because you have a given job doesn’t mean you’re good at it.
“I’d like you to know that almost all of the directors I have met over the years have been decent, likable and intelligent. They dressed well, made good neighbors and were fine citizens. I’ve enjoyed their company. Among the group are some men and women that I would not have met except for our mutual board service and who have become close friends,” Buffett wrote.
“Nevertheless, many of these good souls are people whom I would never have chosen to handle money or business matters. It simply was not their game.”
In Buffett’s typically disarming style, he immediately turns the example into self-deprecation.
“They, in turn, would never have asked me for help in removing a tooth, decorating their home or improving their golf swing. Moreover, if I were ever scheduled to appear on ‘Dancing With the Stars,’ I would immediately seek refuge in the Witness Protection Program,” he wrote.