The five most dangerous words are: `Everybody else is doing it
October, 12th 2006
MR WARREN BUFFETT, Chairman and CEO, Berkshire Hathaway Inc.
Do no wrong. Sounds like grandma advice, but that\'s what the world\'s second richest man, Warren Buffett, told his managers recently.
\"In a September 27 memo, Buffett cautioned managers that many corporate scandals arise because questionable activity is accepted as normal behaviour,\" reads an Omaha-datelined story from the Associated Press.
Omaha, Nebraska (US), is where Berkshire Hathaway Inc is located. \"A holding company owning subsidiaries engaged in a number of diverse business activities,\" informs the latest annual report on www.berkshirehathaway.com. And the `Oracle of Omaha\', as the 76-year-old Buffett is called, is the company\'s Chairman and CEO.
In 1943, when he was 13 years old, \"Buffett filed his first income-tax return, deducting his bicycle as a work expense,\" narrates Wikipedia. Two years later, he and his friend bought a used pinball machine for $25 and placed it in a barbershop. \"Within months, they owned three machines in different locations.\"
As you may remember, in June this year, he announced that he would give away `more than 80 per cent, or about $37 billion, of his $44 billion fortune to five foundations in annual gifts of stock, starting in July 2006,\' and `the largest contribution will go to the Bill and Melinda Gates Foundation,\' fills in http://en.wikipedia.org.
What is the sudden provocation behind the latest missive from Buffett? The unrelenting march of corporate scandals in the US. For instance, \"McAfee Fires Weiss Over Stock Options, CEO Samenuk Steps Down,\" is from Bloomberg `43 minutes ago\', and `Monster founder McKelvey quits over option grants probe,\' is from Earthtimes.org.
These, even as Sanjay Kumar, former chief executive of CA (Computer Associates), awaits verdict for his part in \"the accounting scandal that involved recording quarterly revenue from software sales after the quarter had finished, in an effort to prop up CA\'s share price,\" reports http://computerworld.co.nz. And HP (Hewlett-Packard) is fighting hard to come clear in the ongoing spying case.
Don\'t be deluded into creative accounting just because \"everyone else is doing it\" cautions Buffett. \"The five most dangerous words,\" he alerts. A `seductive argument,\' he calls it. For, \"Berkshire\'s reputation is in your hands.\"
But the empire called Berkshire Hathaway is big and growing. It owns \"a diverse mix of more than 60 companies, including insurance, reinsurance, carpet, jewellery, furniture, restaurants and utility firms,\" the AP report states.
\"Back in 1965, when we owned only a small textile operation, the task of calculating intrinsic value was a snap,\" reminisces Buffett in the 2005 annual report. \"Now we own 68 distinct businesses with widely disparate operating and financial characteristics. This array of unrelated enterprises, coupled with our massive investment holdings, makes it impossible for you to simply examine our consolidated financial statements and arrive at an informed estimate of intrinsic value.\"
Employees added up to 1,92,012.
Code of ethics and `rule of thumb\'
`Code of business conduct and ethics\' is a 5-page document on the company site. \"The company is proud of the values with which it conducts business. It has and will continue to uphold the highest levels of business ethics and personal integrity in all types of transactions and interactions,\" reads the `purpose\'.
The code is but `a rough guide,\' concedes the document. When `confronted with ethically ambiguous situations\', and therefore `in doubt\', remember `Warren Buffett\'s rule of thumb\', it exhorts. What\'s that? \"... I want employees to ask themselves whether they are willing to have any contemplated act appear the next day on the front page of their local paper to be read by their spouses, children and friends with the reporting done by an informed and critical reporter.\"
The ninth and the last of `Ethical Standards\' in the code is `significant accounting deficiencies\'.
It requires the CEO and each senior financial officer to promptly bring to the attention of the audit committee \"any information he or she may have concerning (a) significant deficiencies in the design or operation of internal control over financial reporting which could adversely affect the company\'s ability to record, process, summarise and report financial data or (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the company\'s financial reporting, disclosures or internal control over financial reporting.\"
Six `acquisition criterion\'
As new companies are added to the portfolio, it becomes necessary to keep repeating ethics lessons. \"Unlike many business buyers, Berkshire has no `exit strategy\',\" explains Buffett in his letter to the shareholders, in the 2005 annual report.
\"We buy to keep. We do, though, have an entrance strategy, looking for businesses in this country or abroad that meet our six criteria and are available at a price that will produce a reasonable return. If you have a business that fits, give me a call. Like a hopeful teenage girl, I\'ll be waiting by the phone.\"
A section titled `acquisition criteria\' lists six points, along with Buffett\'s characteristic comments:
\"Large purchases (at least $75 million of pre-tax earnings unless the business will fit into one of our existing units),
Demonstrated consistent earning power (future projections are of no interest to us, nor are `turnaround\' situations),
Businesses earning good returns on equity while employing little or no debt,
Management in place (we can\'t supply it),
Simple businesses (if there\'s lots of technology, we won\'t understand it),
An offering price (we don\'t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).\"
It may be argued that advices, as in the latest memo of Buffett, are but platitudes.
Yet, it helps to set one\'s shoulder to the wheels of goodness, just when the cart threatens to get stuck in mud.