I’d like to show you some of the methods Warren Buffet uses to build trust in his company, Berkshire Hathaway.
I found this impressive manifestation of trust-centric marketing when I was thumbing through some old Berkshire Hathaway annual reports recently.
Under the heading of ‘Corporate Governance’ in his 2003 annual report (a time when his shares were trading above US$100,000.00 each), I discovered the following company policies. If you’re short of time, I’ve emboldened the salient points…
True independence – meaning the willingness to challenge a forceful CEO when something is wrong or foolish – is an enormously valuable trait in a director. It is also rare. The place to look for it is among high-grade people whose interests are in line with those of rank-and-file shareholders – and are in line in a very big way.
We’ve made that search at Berkshire. We now have eleven directors and each director, combined with members of their families, owns more than $4 million of Berkshire stock. Moreover, all have held major stakes in Berkshire for many years. In the case of six of the eleven, family ownership amounts to at least hundreds of millions and dates back at least three decades. All eleven directors purchased their holdings in the market just as you did; we’ve never passed out options or restricted shares. Charlie and I love such honest-to-God ownership. After all, who ever washes a rental car?
In addition, director fees at Berkshire are nominal (as my son, Howard, periodically reminds me). Thus, the upside from Berkshire for all eleven is proportionately the same as the upside for any Berkshire shareholder. And it always will be.
The downside for Berkshire directors is actually worse than yours because we carry no directors and officers liability insurance. Therefore, if something really catastrophic happens on our directors’ watch, they are exposed to losses that will far exceed yours.
The bottom line for our directors: You win, they win big; you lose, they lose big. Our approach might be called owner-capitalism. We know of no better way to engender true independence. (This structure does not guarantee perfect behavior, however: I’ve sat on boards of companies in which Berkshire had huge stakes and remained silent as questionable proposals were rubber-stamped.)
I can promise that your economic result from Berkshire will parallel ours during the period of your ownership: We will not take cash compensation, restricted stock or option grants that would make our results superior to yours. Additionally, I will keep well over 99% of my net worth in Berkshire. My wife and I have never sold a share nor do we intend to.
Reflecting on some of the alleged causes of today’s economic crisis, it’s a pretty relevant passage of text, hey.
I hope you found it as refreshing and as inspiring as I did.