Corporate governance concerns at berkshire hathaway

CORPORATE GOVERNANCE CONCERN AT

INTRODUCTION

• BERKSHIRE HATHWAY-Conglomerate operating in diverse business

• Started in 1889 as a textile manufacturer.• CEO-Bufett took control over company due to financial

problems.• Berkshire Hath way expanded by acquiring holding companies

such as Coco-Cola and Mc Donald.• Buffett an ethical individual meticulously nurtured for decades.• His lasting contribution was not money but to give wealth for

charitable good.

MODE OF OPERATIONS

• Preferred to have least number of staff at the office head.

• Fundamental duty of head office was to invest in excess cash flow to the business divisions.

• Berkshire main mechanism:Achieve organizational objectivesCreate shareholders valueFollowed the laissez-faire management approach

ControversiesThe David Sokol Affair

• On March 14, 2011 Berkshire entered into an agreement to buy Lubrizol corporation

• Lubrizol was offered a price which was 28% over the closing price for the shares

• David Sokol’s Resignation

• Insider Trading

• More Delegation than necessary

Compromise on the Audit front?

• Flanagan illicit activities

• Unaware Deloitte

• Berkshire Retains Deloitte

Flip-Flops on ‘Weapons of Mass Destruction’

• Mr. Buffet had described derivatives as time bombs and as financial weapons of mass destruction.

• He also described it as “Hell”.

•A key regulation proposed- Keep in reserves a certain amount of cash as security to pay losses. But Mr. Buffet pushed fiercely for a provision which excluded existing derivative deals.

•Experts criticized Mr. Buffet for attempting to dilute a legislation and for widely employing derivate contracts in Berkshire, which had a negative impact on company’s financials

-In third quarter of 2011 Berkshire’s profits fell by 24% due to notional losses on derivatives

-In the forth quarter of 2011 Berkshire’s profit declined 30% on account of derivative losses.

ACCOUNTING CONTROVERSY

•Berkshire was in controversy with SEC

•Berkshire attributed its unwillingness to not record unrealized losses on stocks

•However, Finally Berkshire yielded to SEC’s demand and wrote down the value of stocks

•Berkshire did not follow the accounting regulations and refused to write down the value of two its major stocks

American Deal

Question of Independence of Berkshire's Independent Directors• The Berkshire Proxy Statement for the Annual Meeting for Board of Directors dated May 5, 2012 (Proxy Statement, 2012)

• It stated that the Governance Committee of the Board of Directors had agreed that the following directors were independent and that none of them had any material relationship with the company which curtailed his/ her capacity to act as an independent director:

Stephen B. Burke (Burke); Susan L. Decker; William H. Gates III (Gates); David S. Gottesman (Gottesman); Charlotte Guyman; Donald R. Keough (Keough); Thomas S. Murphy (Murphy), and Walter Scott, Jr (Scott)...

Looking Ahead•Till 2010, corporate governance was not considered.

•Appeared weak since the start of 2011, when it trailed the S&P 500 in 2010.

•Buffett’s preferring a laissez-fare management approach.

•Berkshire had exposures to different segments of the US Economy.

•By May 2012, investment were in excess of US $ 100 billion.

•Berkshire got into new businesses and new geographical territories, and they have overlooked the management.

•Berkshire always believe in definite and non-negotiable regulations.

•Buffett believed in “you never really know how the power and responsibility will change them.