Corporate Governance Concerns at Berkshire Hathaway

Abstract:

Berkshire Hathaway (Berkshire), a conglomerate having roughly 80 subsidiaries as of March 2011, and, which generated superior returns for shareholders, is a prime example of such blue chip entities. Berkshire was equally known for the famed personality of its head, Warren Buffett (Buffett), who believed in a hands-off style of management and gave unfettered freedom to the heads of the subsidiaries to operate their respective businesses the way they wanted, subject to the conglomerate's reputation not being compromised. Buffett’s laissez-faire approach could be gauged from the fact that the conglomerate whose turnover for financial year 2010 was around US $136 billion had, as of April 2011, just 21 employees at its head office to administer its 257,000 employees.

The case describes some of the issues in the company's history since the second half of the previous decade such as issues related to internal trading, audit-related issues, Buffett's inconsistent stand on derivatives, and issues related to Berkshire's investment in Bank of America. Some experts were of the opinion that these corporate governance issues at Berkshire would not have cropped up if Berkshire had not been unduly dependent on Buffett and if Berkshire's independent directors had actually been independent and acted as such. The questions on the independence of the board was considered all the more urgent in case of Berkshire, a conglomerate where Buffett's was the last word and whose returns since 2010 had been trailing the benchmark Standard & Poor's 500 index. This case is meant for MBA/MS students as a part of the Corporate Governance/ Management Control Systems curriculum.

Issues:

» Understand the connection between robust internal control and compliance mechanisms and organizational performance.
» Understand the role played by independent directors in ensuring effective corporate governance.
» Analyze the extent to which trust can play a role superior to that of formal checks and balances.
» Understand the relative importance of organizational reputation and its performance.
» Discuss whether circumventing internal control mechanisms for the sake of agility are justified.

Contents:

Keywords:

Corporate Governance; Independence of the board; Board’s relationship with CEO; Controlling; Management control systems; Compliance; Control mechanisms; Conglomerate; Management style; Laissez-faire management approach; Insider trading; ethics; Berkshire Hathaway; Warren Buffett

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