More Praise for The Warren Buffett Way, First Edition

New York Times,
or 
Times Mir ror
the
same $10 million he did in the Post, his investment returns would have
been above average, ref lecting the exceptional economics of the news-
paper business during this period. But the extra $200-$300 million
in market value that the 
Washington Post
gained over its peer group,

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T H E W A R R E N B U F F E T T W AY
Buffett says, “came, in very large part, from the superior nature of the
managerial decisions made by Kay [Katherine Graham] as compared to
those made by managers of most other media companies.”
22
Katherine Graham had the brains to purchase large quantities of the
Post’s stock at bargain prices. She also had the courage, he said, to con-
front the labor unions, reduce expenses, and increase the business value
of the paper. 
Washington Post
shareholders are fortunate that Katherine
Graham positioned the company so favorably.
WA R R E N B U F F E T T O N M A N A G E M E N T, E T H I C S ,
A N D R AT I O N A L I T Y
In all his communications with Berkshire shareholders, and indeed with
the world at large, Buffett has consistently emphasized his search for
honest and straightforward managers. He believes that not only are
these binding corporate values in today’s world, they are also pivotal is-
sues that determine a company’s ultimate success and prof itability in
the long term. Executive compensation, stock options, director inde-
pendence, accounting trickery—these issues strike a very personal chord
with Buffett, and he does not hesitate to let us know how he feels.
CEO Avarice and the Institutional Imperative
In his 2001 letter to shareholders, Buffett wrote, “Charlie and I are dis-
gusted by the situation, so common in the last few years, in which share-
holders have suffered billions in losses while the CEOs, promoters and
other higher-ups who fathered these disasters have walked away with
extraordinary wealth. Indeed, many of these people were urging in-
vestors to buy shares while concurrently dumping their own, sometimes
In evaluating people, you look for three qualities: integrity,
intelligence, and energy. If you don’t have the f irst, the other
two will kill you.
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W
ARREN
B
UFFETT
, 1993

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using methods that hid their actions. To their shame, these business lead-
ers view shareholders as patsies, not partners. . . . There is no shortage of
egregious conduct in corporate America.”
24
The accounting scandals set off alarm bells across the United States,
especially for anyone who held stock in a company 401( k) plan. Share-
holders started asking questions and wondering if their companies were
managing their affairs honestly and transparently. We all became in-
creasingly aware that there were major problems in the system: CEOs
were getting huge paychecks while using company money for private
jets and ostentatious parties, and directors were often rubber-stamping
whatever decisions management decided to take. It seemed as if not one
CEO could resist the temptation to get in on the enormous salaries and
extravagant lifestyles enjoyed by others. That is the institutional imper-
ative at its most destructive.
Things have not improved much, according to Buffett. In his 2003
letter to shareholders, he lambasted the seemingly unabated “epidemic of
greed.” He wrote, “Overreaching by CEOs greatly accelerated in the
1990s as compensation packages gained by the most avaricious—a title
for which there was vigorous competition—were promptly replicated
elsewhere. In judging whether Corporate America is serious about re-
forming itself, CEO pay remains the acid test. To date, the results aren’t
encouraging.”
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This from a man who has no stock options and still pays
himself $100,000 a year.
Stock Options
In addition to these lofty salaries, executives of publicly traded com-
panies are customarily rewarded with f ixed-price stock options, often
tied to corporate earnings but very seldom tied to the executive’s actual
job performance.
This goes against the grain for Buffett. When stock options are
passed out indiscriminately, he says, managers with below-average per-
formance are rewarded just as generously as the managers who have had
excellent performance. In Buffett’s mind, even if your team wins the
pennant, you don’t pay a .350 hitter the same as a .150 hitter.
At Berkshire, Buffett uses a compensation system that rewards man-
agers for performance. The reward is not tied to the size of the enter-
prise, the individual’s age, or Berkshire’s overall profits. Buffett believes

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that good unit performance should be rewarded whether Berkshire’s
stock price rises or falls. Instead, executives are compensated based on
their success at meeting performance goals keyed to their area of respon-
sibility. Some managers are rewarded for increasing sales, others for re-
ducing expenses or curtailing capital expenditures. At the end of the
year, Buffett does not hand out stock options—he writes checks. Some
are quite large. Managers can use the cash as they please. Many use it to
purchase Berkshire stock.
Even when stock options are treated as a legitimate aspect of exec-
utive compensation, Buffett cautions us to watch how they are ac-
counted for on a company’s balance sheet. He believes they should be
considered an expense so that their effect on reported earnings is clear.
This seems so obvious as to be unarguable; sadly, not all companies see
it this way.
In Buffett’s mind, this is another facet of the ready acceptance of ex-
cessive pay. In his 2003 letter to shareholders, he wrote, “When CEOs
or their representatives meet with compensation committees, too often
one side—the CEO’s—has cared far more than the other about what
bargain is struck. A CEO, for example, will always regard the difference
between receiving options for 100,000 shares or for 500,000 as monu-
mental. To a comp committee, however, the difference may seem unim-
portant—particularly if, as has been the case at most companies, neither
grant will have any effect on reported earnings. Under these conditions,
the negotiation often has a ‘play money’ quality.”
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Buffett’s strong feelings about this subject can be seen in his re-
sponse to Amazon’s announcement in April 2003 that it would start ex-
pensing stock options. Buffett wrote to CEO Jeff Bezos that it took
“particular courage” and his decision would be “recognized and re-
membered.”
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A week later, Buffett bought $98.3 million of Amazon’s
high-yield bonds.
Malfeasant Accounting and Shady Financing Issues
Anyone who was reading a daily newspaper in the second half of 2001
could not help but be aware of the growing tide of corporate wrong-
doing. For months, we all watched with something amounting to horror
as one scandal followed another, involving some of the best-known
names in American industry. All came to be lumped under the umbrella

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term “accounting scandal” because the misdeeds centered on accounting
trickery and because the outside auditors who were supposed to verify
the accounting reports were themselves named as parties to the actions.
It’s far broader than accounting, of course; it’s about greed, lies, and
criminal acts. But accounting reports are a good place to look for signs of
trouble. In his 2002 letter to shareholders, Buffett warned investors to be
careful in reading annual reports. “If you’ve been a reader of financial re-
ports in recent years,” he wrote, “you’ve seen a f lood of ‘pro-forma’
earnings statements—tabulations in which managers invariably show
‘earnings’ far in excess of those allowed by their auditors. In these pre-
sentations, the CEO tells his owners ‘don’t count this, don’t count that—
just count what makes earnings fat.’ Often, a forget-all-this-bad-stuff
message is delivered year after year without management so much as
blushing.”
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Buffett is plainly disgusted by the scandals. “The blatant wrongdoing
that has occurred has betrayed the trust of so many millions of sharehold-
ers.” He blames the heady days of the 1990s, the get-rich-quick period
he calls the Great Bubble, for the deterioration of corporate ethics. “As
stock prices went up,” he says, “the behavioral norms of managers went
down. By the late 90s, CEOs who traveled the high road did not
encounter heavy traffic. Too many have behaved badly, fudging numbers
and drawing obscene pay for mediocre business achievements.”
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And
in too many cases, their companies’ directors, charged with upholding
shareholder interests, failed miserably.
Director Negligence and Corporate Governance