Notes on Charlie Munger’s favorite human misjudgment by Whitney Tilson Via Value Investing World
Charlie Munger’s Opening Remarks
I feel a duty in these later years to talk a little bit because so many of you have come so far and therefore I’m going to talk a little about current change conditions in corporate governance, the investment world, how we’re adapting at Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) and WESCO International, Inc. (NYSE:WCC), and how you might face these challenges.
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Charlie Munger: Corporate Governance
First, corporate governance. We’re having a mild revolution in corporate governance. Congress passed rules requiring that a majority of directors be independent, which has affected all kinds of companies, including Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) and WESCO International, Inc. (NYSE:WCC). At Costco Wholesale Corporation (NASDAQ:COST), we added Bill Gates Sr. [actually, Bill Gates’s father is Jr. and Bill Gates, the head of Microsoft, is Bill Gates III (hence the nickname “Trey”), but everyone calls them Sr. and Jr.] and Daniel Evans – I like to see young people joining the board. [Laughter. Gates and Evans are both 79 years old.]
I think it’s a plus at Berkshire Hathaway. We have a very able, brilliant group of shareholders. We pay a pittance but everyone we asked [to join our board] agreed to come aboard: Bill Gates, Sandy Gottesman, Tom Murphy, Don Keough, Charlotte Guyman – there’s a couple of billion dollars of Berkshire Hathaway stock in the Gottesman family.
Then they passed Sarbanes-Oxley, which creates all kinds of oaths and compliance procedures. One thing it caused was an enormous increase in costs. The auditors must certify the internal controls. At Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B), including WESCO International, Inc. (NYSE:WCC), this used to cost $200,000 but now it’s in the multiple millions. It’s not all wasted though – only about 80% is wasted. (Laughter)
There are some results to the good. But the cost of being a publicly traded stock has gone way, way up. It doesn’t make sense for a little company to be public anymore. A lot of little companies are going private to be rid of these burdensome requirements. The problem is that you can require people to solemnly swear that their financials are accurate, but the only way to do it is to trust a lot of other people. That’s what they did before and that’s what they do now. I think someone in Congress thought that the President of Exxon Mobil Corporation (NYSE:XOM) would run around and count the barrels of oil. Well, it’s not going to happen. There needs to be deserved trust.
I think the current requirements are good. It makes it easier to prosecute crooks. But for the organization and for ordinary people, I don’t think Sarbanes-Oxley will create a lot of control.
Charlie Munger: Impact of Scandals and Press Coverage
But another change is having a dramatic effect on corporate governance and behavior – that’s the widespread scandal and press coverage which has caused shame, disgrace, personal legal costs, and ruined many lives. That has changed behavior – even more so than in the past, during the price-fixing scandal when they carted executives off to jail. That had an effect [but the current scandals are having more of an effect]. This wave of scandal and widespread press coverage has had an unbelievably strong impact on corporation behavior – it’s overdue.
Think of the publicity of Enron, WorldCom and Tyco International Ltd. (NYSE:TYC). And the mutual fund industry – many firms had some whiff of scandal. Personally, I think what happened to the Strong funds was an outrage. The independent directors found him stealing, but instead of firing him and finding another manager for the funds, they instead allowed him to sell the firm. This shows how permissive and evil a culture can become.
See full Charlie Munger’s Favorite Human Misjudgment in PDF format here.