Does One Size Fit All?

Our Best Practices view:

Of course not.

For example, Alexander Krakovsky wrote several papers, arguing that the same “set of tricks” that consultants knew from their Western experiences cannot be applied to mass-privatized companies in the former Soviet Union.  After much deliberation, his papers were published by the OECD and the World Bank’s Beyond Transition newsletter. See here,  here, and here.

Businesses are complex systems.  A business is created, thrives and operates on its uniqueness, and not on conformity to standards.   That is why we believe that shareholders should be able to opt-out of any governance standard imposed by a  regulator.  That is also why we discuss alternatives to many of the best practices.

However, there is a basic principle: managers work for shareholders. They do not work for themselves unless they own 100% of the company.  Uniqueness does not justify unaccountability.  The majority of the best practices described herein apply most of the time.  Yes, there are exceptions, but the exceptions need to be justified by the unique circumstances.  For example:

The CEO and Chairman of Berkshire Hathaway is the same person.  This is normally a bad practice.  However, Warren Buffet together with Charles Munger and their close families own very large stakes in Berkshire Hathaway.  What’s more, Buffett’s only income (or loss) is the change in the value of his Berkshire shares.  He does not receive a large salary or bonuses or options or anything else that is the standard CEO fare in most public companies.  He manages Berkshire because it is his.  As investors we like to be in the same boat with the manager and can understand why in this circumstance he should have more control than normal.  (This does not take away from our concern about the future of Berkshire and the succession planning, but at least we feel comfortable with Buffet holding both posts).

However, Berkshire Hathaway is unique.  In most cases, the CEO is a hired manager who receives millions in short-term compensation and owns relatively little of the company stock.  This is unavoidable as public companies long outlive and out-morph their founders.  Only the boards stand between the CEOs and their incentives, their compensation and their jobs.  Allowing a CEO to preside over the body that determines her compensation and employment is not unlike allowing a tail to wag the dog. 

This is why in our view, combining the CEO and the chairman posts is a bad practice.  However, Mr. Buffett gets an exception for the reasons outlined above.