With all the competing priorities being placed on corporate America, it seems as if the goals and objectives of running a profitable and prudent governance-focused organization are becoming increasingly difficult. At one time, the success of operating a business was based on the following;
- Balance sheet strength – determined by asset quality and capital adequacy;
- Income statement strength – based on investment efficiency; and
- Shareholder distributions – allocation of revenues for ownership and future growth.
In looking at these factors, it has been interesting to note recent events that took place in the United States earlier this year involving Berkshire Hathaway and, even more recently, Twitter. The specific questions concerning Berkshire involved the stance taken by several institutional investors in an attempt to prevent Warren Buffett from holding both the Chairman and CEO positions. The 91-year-old Buffet has been the Chairman and CEO of Berkshire since 1970.
This was a well-known fact, and no action has ever been taken to conceal the fact that Mr. Buffet enjoyed being both the Chairman and CEO; however, many of Berkshire’s shareholders, including the California Public Employees Retirement System – or CalPERS – believe the Chairman and CEO roles need to be separate and distinct responsibilities. CalPERS believes these roles are greatly diminished when held by a single company official. They thought that this weakened the company’s governance structure.
In this particular instance, I do not share this philosophy since Mr. Buffet’s and Berkshire’s interests were properly aligned since he was the company’s founder and largest shareholder. I could not find one story that insinuated (or confirmed) that Buffet abused or took advantage of Berkshire. He could never be accused of excessive compensation as he is paid a paltry salary of $100,000 a year. The question is: Did Buffet align his personal interest with Berkshire’s interest? A 50-year-plus track record seems to confirm this!
Now, let’s compare this situation to the recent news surrounding Elon Musk’s recent purchase of Twitter. It was reported that outside of Jack Dorsey – the founder who resigned from the board – the remaining members owned less than 1% of the company’s shares even though the board members were well-paid for their oversight of the company.
However, if you look closely at the company’s performance, you will discover that the company has only posted a profit for two years since 2010. And yet, based on the recent actions taken by the new management team, it appeared Twitter was significantly over-staffed and had other issues concerning bloated general and administrative expenses. The lack of adequate cost controls contributed to the company’s uneven financial history.
These monetary difficulties happened when different individuals held the company’s COB and CEO positions. It should be noted that over-staffing was not unique to Twitter, as several other high-profile tech companies are dealing with this issue, including the fact that Meta-Facebook is terminating over 14,000 employees.
And lastly, the recent events involving FTX will most likely reveal another scandal involving the absence of trustworthy financial information, including a lack of financial safeguards and internal controls. According to the newly appointed FTX CEO John Ray III, who previously served at Enron, he had never seen such a complete failure of corporate controls in his 40 years of legal and restructuring experience.
According to Ray, many of the companies in the FTX Group, especially those organized in the Bahamas, did not have any appropriate governance standards, including the fact that there were never any documented meetings of the board. On the bright side – things were not a total loss since one of FTX’s US subsidiaries had its own independent Chairman of the Board.
Conclusion – Hopefully, this proves that one size does not fit all when running a reputable business. Character, morals, experience, and reputation are still necessary to be successful!
Prepared by Terry L. Stroud – November 2022
