There is something slavishly unbecoming in the almost messianic reverence some investors have for Warren Buffett. His annual newsletter, admittedly a rollicking read, is often treated as if it’s the long-lost commercial script of the Gnostic gospels, dug up in Omaha, by way of Nag Hammadi.
But then I suppose at 89 years old, with Berkshire Hathaway having produced an annual gain of 20.3% per year since 1965, perhaps you’re entitled to throw around wisdom and have fans write elaborate essays about your use of the word "independent".
As it happens, Buffett’s newsletter this year does shed some light on one of the blights on SA’s corporate landscape in recent years: the rash of accounting and governance car crashes. You’ve seen the movie: Steinhoff, Tongaat Hulett, EOH and Sasol.
Steinhoff, don’t forget, had an accounting scandal even though it had three PhDs in accounting on its board: Len Konar, former Absa CEO Steve Booysen and former FirstRand executive Theunie Lategan. Critics have rounded on them, saying they must have been dozing while Markus Jooste was merrily tipp-exing out numbers and adding his own.
Yet this is what Buffett says about audit committees: "Audit committees now work much harder than they once did, and almost always view the job with appropriate seriousness. Nevertheless, [they] remain no match for managers who wish to game numbers, an offence that has been encouraged by the scourge of earnings ‘guidance’ and the desire of CEOs to ‘hit the number’."
Buffett also has some interesting thoughts on why it is that CEOs end up cooking the books in the first place.
"My direct experience — limited, thankfully — with CEOs who have played with a company’s numbers indicates that they were more often prompted by ego than by a desire for financial gain," he writes.
Now that’s a useful insight, which should be of interest to nominations committees on SA’s boards. Understanding why Jooste and others of his ilk cut corners is an unanswered question, as baffling to criminologists as it is to boards of directors.
‘CEOs who have played with a company’s numbers were more often prompted by ego than by a desire for financial gain’
Bad CEOs, Buffett says, also try to game the system in other ways. For example, they’ll veer away from nominating any nonexecutive director to the board who’s likely to challenge either their pay or acquisition dreams. "When seeking directors, CEOs don’t look for pit bulls; it’s the cocker spaniel who gets taken home," he writes.
For him, the ideal nonexecutive director boards should hire is business-savvy and owner-orientated, and has well-developed thoughts and proper principles.
But there’s another reason why Buffett’s letter is worthy of some admiration at least, even if it wouldn’t have made the cut for inclusion in the New Testament at the Council of Nicaea in 325 CE.
It’s all written exceedingly simply. It’s an approach at odds with the dreary CEO reports we see in the annual reports of most JSE companies, which are an embarrassing mess of meaningless corporate jargon.
Buffett told CNBC this week that he writes as if he’s reporting to his sisters, who aren’t active in business. "I pretend that they’ve been away for a year and I’m reporting to them on their investment," he said.
Now consider this epistle, penned by former Life Healthcare CEO Shrey Viranna in the hospital group’s last annual report: "We continue differentiated offerings through quality service delivery and standards, building long-term stakeholder relationships. Our newly developed group clinical quality and governance framework provided the foundation for the initiation of a number of clinical governance and quality integration projects."
It’s breathtakingly vacuous in scope, a Dilbertian paragraph that could have been easily edited out of any first-year MBA marketing assignment. But I suppose if Life Healthcare had seriously wanted you to understand it, it would have written it in English.
It’s worlds apart from, say, Hosken Consolidated Investments’ annual report. Here’s CEO Johnny Copelyn: "Crazy populist pressure on the state to embark on the most inappropriate economic policies, like expropriating land without compensation and hobbling the independence of the Reserve Bank, [is] unquestionably going to inhibit confidence in the country. This remains the case despite platitudes by the most senior state officials."
Copelyn tells the FM that he wouldn’t dare compare his report to Buffett’s, though: "He has decades of outperforming the market and everyone wants to hear a word or two as to what he thinks about the future."
But, says Copelyn, the CEO of a holding company ought to have something different to say, either philosophical, political or analytical. "Most centrally it should try to offer investors some insight as to the outlook of the person responsible for allocating capital being retained in the group. Ultimately the success or otherwise of those choices determines the [future]," he says.
If only all CEOs replaced their made-up phrases — like "rightsizing", "key learnings" and "operationalise earnings" — with actual words, the stock markets would be shrouded in far less mystique for most South Africans.
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