Don't get Warren Buffett started on executive compensation. At Berkshire Hathaway's annual shareholder meeting and again at Berkshire's press conference, Buffett criticized the amounts CEOs are paid as well as option packages that reward management for a market rally rather than an increase in a company's intrinsic value.
Further, he questioned the motives of compensation consultants who are hired by the company's executives in the first place and know that they won't get hired again if they recommend a stingy pay package.
I was heartened to hear Buffett then draw parallels to the fund industry. Fund directors determine a fund's fees, yet "they always decide to maintain the fee even when management has been woefully inadequate," he said.
Further, fund directors are asleep at the switch when it comes to hiring managers. "Every year they meet to decide which managers to hire, yet they always decide to hire the same guys who produced lousy performance," he said.
In Buffett's view, the problem is that directors don't have enough at stake: "If they had $10 million or $15 million in the fund, they wouldn't do that," he said.
Now all we need is a company like Berkshire to invest in mutual funds and teach some lessons on corporate governance.
Buffett considers Sequoia Fund to be the closest follower of his investment philosophy. Asked to pick among Sequoia, Clipper and Tweedy Brown American Value, Buffett noted that manager Bill Ruane was in the same class at Columbia as he, and the fact that he put his partnership investors into Sequoia when he liquidated his limited partnership.
Still, he said all three were of a similar mindset, and he noted that he used to "hang out" at Tweedy's offices and even bought his first shares of Berkshire from Tweedy.