Corporate Governance Concerns at Berkshire Hathaway|Business Ethics|Case Study|Case Studies

Corporate Governance Concerns at Berkshire Hathaway

            
 
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Case Details:

Case Code : BECG123
Case Length : 17 Pages
Period : 2010-2012
Organization : Berkshire Hathaway
Pub Date : 2012
Teaching Note : Not Available
Countries : US; Global
Industry : Conglomerate

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.



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Excerpts

Mode of Operations

Buffett, Berkshire's CEO and the Chairman of its Board of Directors, oversaw the heads of Berkshire's subsidiaries with the help of Vice Chairman Charles Munger (Munger). He preferred to have the least number of staff at the head office. At Berkshire, there was acute delegation of capital allotment decisions to the head office and of operating decisions to each of the subsidiary companies. The fundamental duty of the head office was to invest the excess cash flows accruing to the business divisions. Choosing from among the options in which to invest these cash flows was the prerogative of Buffett, who, on occasion, asked for Munger's counsel...

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Controversies

The David Sokol Affair

AOn March 14, 2011, Berkshire entered into an agreement to buy Lubrizol Corporation for a cash payment of US$9 billion. It would also be liable for a US$700 million debt on Lubrizol’s books. Lubrizol manufactured lubricants used in engines on big trucks, buses, and boats...

Compromise on the Audit Front?

Some experts criticized Berkshire for compromising the reputation of its audit controls given the dealings that were unearthed by the US regulatory agencies, beginning 2008. In October 2008, the U.S. Securities and Exchange Commission (SEC ) and the Financial Industry Regulatory Authority (FINRA ) were reported to have been investigating Thomas P Flanagan (Flanagan), a former partner and an ex-Vice Chairman of Berkshire’s external auditor, Deloitte & Touche LLP (Deloitte), for trading on insider information in many of its key clients, also comprising its audit clients...

Question of Independence of Berkshire's INndependent Directors

The Berkshire Proxy Statement for the Annual Meeting for Board of Directors dated May 5, 2012 (Proxy Statement, 2012), stated that the Governance Committee of the Board of Directors had agreed that the following directors were independent and that none of them had any material relationship with the company which curtailed his/ her capacity to act as an independent director: Stephen B. Burke (Burke); Susan L. Decker; William H. Gates III (Gates); David S. Gottesman (Gottesman); Charlotte Guyman; Donald R. Keough (Keough); Thomas S. Murphy (Murphy), and Walter Scott, Jr (Scott)...

Looking Ahead

Till 2010, any concerns about Berkshire's corporate governance or any other alleged bungles were brushed aside with the argument that what mattered was the company's financial performance, which was amongst the best. However, the same argument appeared weak since the start of 2011 as Berkshire had trailed the S&P 500 in 2010. According to experts, it was improbable that Berkshire would once again strike deals akin to those executed with troubled financial companies impacted by the 2008 financial crisis...

Exhibits

Exhibit I: Berkshire Hathaway's Financial Performance (2004-2011)
Exhibit II: Sokol's Dealing Leading upto Lubrizol's Acquisition
Exhibit III: Some of the Developments in BoFA's Financial Condition Post Berkshire's Investment in it
Exhibit IV: Excerpts from the Proxy Statement for Annual Meeting of Shareholders dated May 5, 2012
Exhibit V: Stock Chart of Berkshire and S&P 500 (2008-2012)


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