Dominant CEOs may lead staff to commit fraud, warns Buffett
By Katherine Griffiths in New York
Independent News & Media (UK) Ltd.
May 2, 2005
Warren Buffett, America's best-known investor, has issued a damning critique of companies run by dominant chief executives who bully employees into producing smooth earnings growth, suggesting the practice can encourage people to cook the books.
His observation, made yesterday at the popular annual shareholder meeting of his company, Berkshire Hathaway, seemed a pointed reference to a situation he has found himself in recently.
One of America's most morally upstanding businessmen, Mr Buffett has been dragged into an investigation into American International Group. Hank Greenberg, its former chairman and chief executive, is suspected by regulators in New York of manipulating the insurer's finances to keep the company's earnings on an upward trajectory.
Mr Buffett was interviewed last month over the matter because one of the areas investigators are focusing on is a transaction between AIG and General Re, a reinsurer owned by Berkshire Hathaway. Mr Buffett, 74, told thousands of shareholders who had made the trip to Omaha, Nebraska, at the weekend that he could not comment in detail on the investigation.
But he issued a general warning about what he feared most for his company, whose holdings include Coca-Cola, Gillette and American Express, saying there was always the possibility of fraud. He added that he had encountered situations at other companies where there was an "ego" on the board. In such situations, "everybody knew what the [earnings] predictions were, and that the CEO would be mad if they were not met. That can lead to a lot of bad things," Mr Buffett said.
But both he and his long-term business partner, Charlie Munger, stressed Mr Greenberg had achieved a considerable amount. Mr Buffett said Mr Greenberg had built his position to be "the No 1 man" in the insurance industry.
Despite revealing that Berkshire Hathaway lost $310m (£162m) in the first quarter from betting against the US dollar, Mr Buffett told shareholders his downbeat views on the US's $618bn trade deficit and the dollar had not changed.
"This country is a very rich family. We produce a whole lot but we consume a little bit more. The rest of the world is saving and they are investing about $2bn a day in the US.
"They're doing it because they have to, not because they want to. I think the declining dollar is evidence of that," he said.
Mr Buffett ticked himself off for not finding significant acquisitions in the past year and expressed frustration that the number of private equity deals done recently had pushed up prices in several different sectors. But he added that the company was on the brink of a deal in the insurance sector worth less than $1bn.
Mr Buffett was sceptical about the latest big development on Wall Street, the New York Stock Exchange's decision to abandon its not-for-profit status and become a public company.
"I would rather not have an exchange which is trying to encourage people to trade more actively and thereby create more income on those sales because I know American investors will not be better off if volumes double," Mr Buffett said. He and Mr Munger were also scathing about President George Bush's attempts to cut the social security bill by phasing in benefit reductions.