Friday, July 14, 2006

The Wit and Wisdom of Charlie Munger

Here's a nice little piece by Eric Savitz on one of my investing heroes, Charlie Munger. Notice what CM has to say about corporate executive compensation, the accounting profession and hedge funds. Ouch!


The Wit and Wisdom of Charlie Munger
Posted by Eric Savitz

Between blog posts this morning, I ran over to Stanford to listen to Berkshire Hathaway (BRKA) Vice Chairman Charlie Munger speak at Stanford Law School’s Directors’ College, an annual event designed to educate corporate directors. Still sharp as a tack at age 82, Munger held court under a large tent just outside the Law School, seated in a large over-stuffed chair on a raised platform. With notes in hand, he proceeded to dispense wisdom on what’s wrong with corporate governance today - CEO’s are overpaid, accountants have failed us, and the hogs are overeating the hogwash. Here are a few tidbits from his talk, which would have made a fine addition to Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger.

Munger started by saying he would speak in the spirit of one of his law professors, who said “Let me know what your problem is, and I will try to make it more difficult for you.” He framed his talk as a series of questions and answers – he supplied both. For starters, he asked how the influence of directors at large public companies has changed since the 1950s and 1960s. To illustrate how things have changed, he told a story of a man who was asked to be a director of the telephone company, who related that after agreeing to take the seat, “it was the last thing they ever asked me.”

Despite the joke, Munger made the case that the old corporate director system, with “WASP-y white males in a club like atmosphere” actually worked better than what he have now. “The old culture had come out of poverty, out of English customs,” he said. “People did not have the vast sense of entitlement, that they were entitled to be rich. People were damned glad to have a decent job where they might advance.” And he says, it was a time when there was “practically no trading of publicly owned securities, when trading “rarely got to a million shares a day.”

What has happened since? “The system has deteriorated, and the reputation of the system has deteriorated even more than the system,” he said, noting that “a lot of people are mad at corporate governance,” including the kind of white-bread Republicans who should be the system’s biggest supporters. “When even they are mad at Corporate America,” Munger said, “Corporate America has a serious problem.”

Munger blames the excesses of corporate behavior and compensation on several factors, including the human tendency to be self-serving. But he also notes that “old restraints lessened, and new temptations presented.” So no one should really be surprised that excesses emerged. Or as Munger put it: “Expect hogs to eat a lot more in the presence of a lot of hog wash.”

Munger noted that enormous prosperity brought with it a lot of opportunity for “wretched excess.” He blames many of the problems on the failures of the accounting profession. “They really failed the surrounding civilization,” he said. “People started looking at accounting the way they look at the Internal Revenue Service, as a system to be gamed. This was a major failure, a combination of the failure of accounting, the stupidity of regulators and the natural incentives for greed.” And the level of outrage has risen, he said, to the point where it has finally reached “the porch where the country club Republicans sit.”

Munger made a plea to the directors to change the way CEOs are compensated. “CEOs have a duty…to dampen envy and resentment by behaving way more nobly than other people, and way more generously. People should take way less than they are worthy when they are favored by life. People are willing to pay tens of millions of dollars to be U.S. senators. Most of these people would pay to be CEOs….There is a lot to be said for backing off and taking less than their worth.”

He specifically criticized the $400 million compensation package for recently retired Exxon (XOM) CEO Lee Raymond. While he said Exxon might be “the best managed big company that has ever existed,” he says it “damn stupid” to walk away with a “$400 million bonanza.” Said Munger: “It would have been better behavior to take less. ”

One other interesting topic Munger discussed was the concentration of power in the hands of big company CEOs. “We want very good leaders who have a lot of power,” he said, “and we want to delegate a lot of power to those leaders….It’s crazy not to distribute power to people with the most capacity and diligence…Every time I see an opportunity to choose somebody, the second best guy is just awful compared to the guy we hire. Usually the decision is a no-brainer. We have to give power to the people who can wield it efficiently in serious game of survival.”

But he had a caveat to offer. Munger says there will be times in the course of running a company that you have to offend some people to get the job done, but he says you should try “not to offend people needlessly And corporate compensation in America is offending a lot of people needlessly.” One ironic example he offers is the idea that CEOs ought to pay more for using corporate aircraft. “Warren doesn’t like when I talk about corporate aircraft,” referring to the Berkshire ownership in the corporate jet leasing company NetJets, “but there is a lot to be said for charging CEOs more for using the corporate aircraft. There is no reason that we can’t all pay a little more.”

Finally he had some smart answers to questions from the audience.
# On the role played by lawyers versus accountants in recent corporate scandals: “Accounting incomes were reduced by miscreancy,” he notes, but “the net amount paid by lawyers for lawyerly miscreancy is close to zippo. In this case, the goddess of justice was blind.”
# On Berkshire Hathaway Chairman Warren Buffett’s decision to donate most of his fortune to the Bill and Melinda Gates foundation: “Is anyone really surprised that Warren, who is the ultimate embodiment of concentrated decision-making power, picked somebody who he thinks is like him in many important ways? It was a noble and sensible decision.”
# On reforming the SEC: “The SEC does way more good than harm – the last thing I would do is get rid of the SEC…if accounting were thoroughly fixed, a lot of other sins would go away. We’re paying a huge price for deterioration of accounting.”
# On the interaction between government and business: “We’re here at an institution [Stanford] founded by a man [Leland Stanford] who bribed Congress to get his railroad franchises…I’m not constantly bewailing the failures of government – it’s not our main problem at all.”
# On the influence of hedge funds: You ask a heard hedge fund operator why the charge 2 and 20, and they say because I can’t get 3 and 30, he says. “[For hedge funds], it’s not about thinking what is fair and right – but merely how much can I get. It’s a ghastly culture…there will be terrible scandal in due course”


Anonymous Anonymous said...

Why was there no follow on bankruptcy then? The bailout of AIG FP went to (wow power leveling) hedge funds that bound credit swaps on Lehman failing or others betting on rating (wow power leveling) declines. AIG has drained over 100 billion from the government. Which had to go to (wow power leveling) those who bet on failures and downgrades. Many of whom (power leveling)were hedge funds. I-banks that had offsetting swaps needed the money from the AIG bailout or they would have been caught. Its an (wow powerleveling) insiders game and it takes just a little bit too much time for most people to think (wow gold) through where the AIG 100 billion bailout money went to, hedge funds and players, many of whom hire from the top ranks of DOJ, Fed, Treasury, CAOBO

2:20 AM  

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