Even the smartest corporate leaders with the most sterling reputations can disappoint their shareholders on occasion. Headline news concerning a major blunder committed by none other than Warren Buffett gives investors many things to ponder. One key takeaway is how important strong corporate-governance policies are in giving shareholders some power over what goes on at their companies.
Many investors view Berkshire Hathaway's (NYSE: BRK-B) Buffett as a corporate leader who can do no wrong. Some even see him as something akin to the marketplace's spiritual guide.
But this week's controversy surrounding trading behavior of former Berkshire heir apparent David Sokol shows that even Buffett can blunder, too -- and big time. If Buffett can make such a poor judgment in this situation, investors had better ponder the importance of checks and balances at all publicly traded companies.
Poor judgment in unexpected places
Buffett's in the spotlight following Sokol's resignation, which came with a side of extremely controversial news. Sokol bought stock in Lubrizol before encouraging Buffett to consider the lubricant manufacturer as a potential acquisition for Berkshire Hathaway.
Buffett and Sokol are both currently denying any shady or illegal behavior in this incident. Still, the situation looks sketchy, arrogant, and perhaps downright unethical -- if not illegal.
The New York Times has highlighted the takes from some corporate-governance experts: They're mystified that Buffett, of all people, would handle the situation in such a blundering manner.
Regardless of whether Sokol's actions were technically against the law, the experts wonder why Buffett didn't ask more questions when he learned that Sokol owned shares of the company being considered as an acquisition. The fact that Buffett knew this sheds even more mystery on what looks, at the very least, like a very poor judgment call.
This is, after all, Warren Buffett, a man who has so often strongly evangelized for strong ethics not only for his own company but also for the marketplace at large. He's known for his mega-smarts, so it's difficult to imagine he didn't quite catch how something like this might look to outsiders.
This is also the man who last summer cautioned Berkshire's managers: "We can afford to lose money -- even a lot of money. But we can't afford to lose reputation -- even a shred of reputation."
For a long time, Berkshire shareholders could have been forgiven for feeling safe to the point of complacency when it came to Buffett's stewardship. If you couldn't trust Buffett, whom could you trust? But now, it's arguable that stronger governance policies are in order, even at Berkshire Hathaway, a company many consider among the gold standard of U.S. companies because of Buffett's leadership.
Mark your calendar…
This time of year is the best time for considering strong corporate governance, so thanks to Buffett, we have one more reason to check the proxy statements that are showing up in our mailboxes and vote our opinions on these important issues.
Moxy Vote, an online vehicle for shareholder activism through proxy voting, tracks upcoming votes related to various causes at companies' annual meetings. Right now, the site has highlighted several corporate governance-related shareholder proposals that will be subject to voting in the next few weeks:
- Paccar (Nasdaq: PCAR): supermajority voting; director-vote thresholds.
- C.R. Bard (NYSE: BCR): annual election of directors.
- Citigroup (NYSE: C): ability to call special meetings; review and report on controls related to loans, foreclosures, and securitization.
- Honeywell (NYSE: HON): ability to call special meetings; shareholder action by written consent.
- Hudson City Bancorp: Declassification of the board of directors.
One of the most accessible issues in corporate governance is CEO pay, and there's no shortage of attention in that regard this year, not to mention shareholder action. Shareholders have recently voted "no" on the compensation plans for major companies such as Hewlett-Packard (NYSE: HPQ), Beazer Homes, and ShuffleMaster.
Democracies, not monarchies
There are good reasons shareholders need to have some methods of recourse and reaction these days, especially when boards of directors so frequently forget their place (and function), too.
Corporate-governance policies such as a close tie between CEO pay and performance, majority voting, the power to call special meetings if necessary, board declassification, and the separation of CEO and chairman titles all give shareholders long-neglected sway in what goes on at their companies.
Corporate leaders aren't kings, not even Warren Buffett. Strong corporate-governance policies ensure some much-needed democratic spirit in a realm that has sorely needed it for quite a while.
Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on corporate governance. And follow all the Fool's coverage of Berkshire Hathaway by adding it to My Watchlist.
