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Berkshire Hathaway
S&P Stupidity

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By AtlantaDon
March 23, 2005

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I don't care about the downgrade by an S&P equity analyst because I find their research opinions to be pretty much useless and I'm OK with anything within reason that has the potential to create a buying opportunity for long-term shareholders looking to add to their positions. However, I must confess that the analyst's remark about concern over BRK's corporate governance based on a checklist from ISS (who slept through Enron, WorldCom, etc.) got under my skin.

I looked on the web for the ISS criteria and found a very thorough and professional paper by someone named Katten Muchin Zavis Rosenman called " The ratings game: corporate governance ratings and why you should care". [Direct PDF Download.] It had a couple of interesting points:

- S&P has its own governance scorecard and the paper does a comparison of the S&P and ISS criteria. The S&P analyst doesn't even use her own company's checklist.

- Rosenman makes comments on the limitations of a mechanical process:

"Recognise that the mechanical ratings process may produce strange results: for example, a company with a controlling shareholder may nevertheless get positive ratings credit for the absence of a poison pill or staggered board - neither of which is a necessary defensive measure when there is a controlling shareholder. Also, the purely mechanical ratings by design give no subjective assessment of the quality of management or the board. Warren Buffett and Berkshire Hathaway best prove this point, with Berkshire Hathaway having received an 'A' rating from the Corporate Library (another rating system she discusses) but a rating of only 1.5 from ISS."

As I was thinking about S&P and corporate governance, I recalled who S&P consulted when it was devising its "core earnings" concept to better capture true economic earnings of companies by adjusting for things like stock options and pensions. They convened a panel that included Buffett, who has been writing about corporate governance issues including stock option accounting, pension accounting, managed earnings and executive compensation for at least a couple of decades.

Despite having a major ownership position in S&P's primary competitor, Moody's, Buffett donated his time to S&P and provided input on the core earnings measure. And then Buffett praised S&P publicly for it, including in an annual letter if I recall correctly. He wrote S&P a letter praising them that they posted on their website because it transferred some of Buffett's credibility on these governance issues to S&P. This wasn't too long after S&P, like Moody's, had the debt of both Enron and WorldCom rated as investment grade up to a week or so prior to their bankruptcy filings.

And now we've got an S&P analyst, at a time when there's a lot of innuendo swirling around Buffett, saying that she is concerned about Berkshire's corporate governance. What a complete joke. If Buffett was the vindictive type, he'd have called the head of S&P in the morning and had the analyst's head on a platter along with a public apology.


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