2005: How much liability should directors have for a company's misconduct?

AUDIENCE MEMBER: Good afternoon, Mr. Chairman, Mr. Vice Chairman. My name is Andy Peake. I’m from Weston, Connecticut.

Recently, we’ve seen a number of corporate boards take forceful action — Hewlett-Packard and Boeing, for example. We have also seen board members from WorldCom pay large amounts to personally settle lawsuits.

Today we see Morgan Stanley embroiled in a bitter battle, largely based on divergent views of how to govern the firm.

What responsibilities do directors have in this new environment? And what do you look for in your directors?

WARREN BUFFETT: Charlie, why don’t you take that one first?

CHARLIE MUNGER: Well, we are completely out of step with modern practices with directors.

The modern practice is to have one from each diversity category, and to have a whole lot of people who need, more or less, the 100,000 or $200,000 per year that they’re paid for being a director. And people think this makes the system better.

At Berkshire, all the directors are rich and they own a lot of stock in Berkshire. And they’re all very smart. And they don’t get any liability insurance provided by Berkshire.

So, we’ve been waiting for our system to spread, but it — we seem to be losing. (Laughter)

WARREN BUFFETT: Yeah, it’s a tough job, at times, to be a director.

The real problem that you can face, and may often face, is when you’re dealing with mediocrity.

I mean, if you have a baseball team and you have a .240 hitter in the majors, a .240 hitter in the majors is still a pretty good baseball player. But if your job is to have a winning team, you get rid of him. And you find somebody that can bat .280 or .290 and field just as well.

In business, the tough part is to get rid of something a notch or two above mediocrity, but not the best one that could be found.

And when people meet every couple of months, and they come from different parts of the country, and they have the normal social instincts — they don’t like to have rump meetings or to sort of talk behind people’s backs — it’s very difficult for a group, and particularly if it’s a group like Charlie described where a significant number of them, the directors’ fees they earn are important to their well-being, and they like — they’d love to be recommended for another board and add another $100,000 a year to their income.

It’s very difficult for somebody to lead a charge and all of a sudden start at the meeting or trying to arrange a rump meeting of some sort to say, you know, “We really think this guy at the head of the table’s no good.”

And changing — dealing with mediocrity is — or, like I say, a notch above it, is a difficult problem if you’re a board member.

And we believe that, you know, independence is — it’s a state of mind. I mean, it — and it’s a willingness, but not the eagerness, to challenge the ideas of others.

And to — if you see a merger that doesn’t make sense — and Charlie and I have seen a lot of them, and we’ve been on the boards, and sometimes we’ve spoken up and sometimes we haven’t spoken up — to be able to — you know, you can — the group around you, in terms of social behavior, can only tolerate a certain amount of obnoxiousness on the part of yourself.

You have to sort of ration it out. And so you save yourself for big ones. And then, it’s not necessarily an easy equation.

And certainly, I would say, of the things I’ve seen proposed in the way of major acquisitions and — a significant percentage of them I wouldn’t do myself. But would I overrule somebody else?

I wouldn’t get the votes probably anyway. And it’s a very difficult thing to do. You could occasionally fire a bullet if you think it’s important enough, and usually it doesn’t do any good.

So, I — we have a group that has — every one of them has significant money invested in Berkshire. They all bought it in the market just like you did. I mean, nobody — I mean, I’ve been on all these boards and they keep handing me things.

And, you know, I had shares of this one and that one are given to me, or options or whatever, matching charitable contributions, all kinds of things.

But we have real owners on our board. And what they make for being board members is really inconsequential, as I get reminded occasionally — (laughter) — compared to their investment. And they’re friends of mine.

They’re smart. They’re very smart. I mean, they are hand-picked, in terms of business brainpower and quality of a human being. And I really think that, you know, we have the best board in the country.

But the people that want — who make their evaluations by checklist, you know, whether — either in terms of diversity or in terms of supposed independence — although I don’t know how anybody that’s getting half their income from board memberships can be independent — you know, we don’t — we may not stack up so well.

But it’s the kind of board that I want to have, knowing that if I die tonight that virtually everything I have goes to a foundation. I want that foundation to have as much money over the years to spend as possible.

And there’s no group of people I’d rather have in charge of the decision subsequent to my death than the people that we’ve got on our —