Warren Buffett and the Case for Less Corporate Governance

Warren Buffett believed deeply in corporate governance. He just didn’t believe good governance meant constantly governing.

For decades, Berkshire Hathaway gave managers extraordinary autonomy. Buffett generally avoided telling CEOs how to run their businesses, and he rarely behaved like the activist investors who accumulate shares and then publicly demand board seats, cost cuts, asset sales, or changes in strategy. Yet Buffett could be remarkably demanding about directors, CEOs, acquisitions, capital allocation, shareholder communication, and managerial integrity.

There is no contradiction here. Buffett’s philosophy was built around a deceptively simple idea: hire people you don’t need to control, give them room to operate, and make sure someone has the courage to act when that trust turns out to be misplaced.

That raises an interesting question about the way we think about corporate governance. What if more governance isn’t always better governance?

Start With Ownership

To understand Buffett’s approach, it helps to begin with how he thought about the corporation itself. In Berkshire Hathaway’s 1983 shareholder letter, Buffett wrote, “Although our form is corporate, our attitude is partnership.” He viewed Berkshire’s shareholders as owner-partners and himself and Charlie Munger as managing partners. The corporation, in this conception, wasn’t an institution standing between investors and the businesses. It was the vehicle through which shareholders owned those businesses. [berkshireh...thaway.com]

That distinction may sound philosophical, but it has very practical consequences. If shareholders are owners, management’s objective isn’t to make the company as large as possible, maximize the CEO’s prestige, or produce the smoothest possible quarterly earnings. The objective is to increase the long-term economic value of each owner’s stake.

Buffett made this explicit in Berkshire’s owner principles. The company’s goal was to maximize the long-term growth of intrinsic business value per share, not simply to increase Berkshire’s size. [berkshireh...thaway.com], [berkshireh...thaway.com]

A company can get bigger while its shareholders get poorer.

That seemingly obvious idea turns out to be fundamental to Buffett’s theory of governance, because executives and shareholders do not always benefit from the same things. A CEO may enjoy running a larger organization with more revenue, employees, influence, and prestige. Shareholders benefit only if expansion increases the value of what they own.

Buffett wanted this ownership mentality to extend into the boardroom. In the 1983 letter, he pointed out that Berkshire’s directors were themselves substantial shareholders. For several directors, more than half of their family net worth was invested in Berkshire. His wonderfully simple description was: “We eat our own cooking.” [berkshireh...thaway.com]

There is a serious governance principle behind the humor. If a director approves a terrible acquisition that destroys billions of dollars of shareholder value, what happens to that director? Perhaps there is embarrassment or reputational damage. But if that director also has a substantial portion of his or her wealth invested in the company, the consequences are very different. The person making the decision experiences the economics of the decision.

Buffett’s framework therefore raises an interesting question about the conventional idea of director independence. Who is more likely to think like an owner: a director who satisfies every technical definition of independence but has little personal capital at risk, or someone whose financial interests rise and fall alongside the shareholders? Buffett did not argue that formal independence was irrelevant. His point was that economic alignment and independence of judgment matter too.

Hire People You Don’t Need to Control

Here is where Buffett’s philosophy departs from the way we often think about governance. If accountability matters so much, shouldn’t boards constantly monitor and supervise management?

Buffett’s answer, in practice, was largely no. His preferred approach was to find exceptional managers with integrity, give them considerable freedom to operate, and stay out of their way. This became a defining characteristic of Berkshire’s decentralized culture and reflected Buffett’s belief that selecting the right people was more important than constructing elaborate systems for supervising the wrong ones.

There is an important distinction here between trust and passivity. A passive board doesn’t challenge management because it is weak, complacent, or too dependent on the CEO. A Buffett-style board may look similarly quiet during good times, but for an entirely different reason: the directors have deliberately concluded that capable managers should be allowed to manage.

The difference becomes visible when something goes wrong. A weak board remains passive because it cannot or will not confront management. A strong board that has granted management considerable autonomy can still act decisively when circumstances require it.

A great board, in Buffett’s conception, should be powerful enough to intervene and disciplined enough not to.

This makes the selection of the CEO enormously important. If directors aren’t supposed to micromanage the chief executive, then perhaps the most consequential governance decision happens before most governance even begins: choosing the person to run the company.

Buffett consistently emphasized both managerial ability and integrity. He was also unusually candid about occasionally getting those judgments wrong. In his 2024 Berkshire shareholder letter, he acknowledged mistakes not only in evaluating the economics of businesses but also in assessing the abilities or fidelity of managers. [berkshireh...thaway.com]

Traditional governance often begins by asking how a board can prevent a CEO from doing the wrong thing. Buffett’s approach starts one step earlier: Why are we entrusting the company to someone we expect to do the wrong thing?

That doesn’t eliminate the need for controls, independent directors, or oversight. It changes their role. Buffett’s system begins with selection rather than supervision.

The Board Exists to Say No

Buffett wasn’t naïve about CEOs. Even an extraordinarily talented executive can have incentives that diverge from those of shareholders, particularly when it comes to compensation and acquisitions. This is where Buffett believed directors mattered most.

The important distinction was between formal independence and genuine independence of mind. Imagine being a well-compensated director of a prestigious company. You like the CEO, the CEO likes you, and you enjoy serving with the other directors. Then management proposes a transformative acquisition. The CEO is enthusiastic, the investment bankers are enthusiastic, and the presentation makes a compelling case for the transaction. But you think the company is about to make an enormous mistake.

At that moment, corporate independence stops being an item on a governance checklist and becomes a question of character: Can you tell the CEO no?

Buffett worried that directors sometimes lacked the necessary “knowledge or gumption” to challenge executives on consequential decisions where management’s interests might differ from those of shareholders. His ideal board wasn’t one that second-guessed management every week. It was one capable of challenging management on the relatively small number of decisions that could permanently alter the economics or reputation of the enterprise. [gurufocus.com]

Acquisitions are perhaps the clearest example because they combine enormous financial consequences with potentially distorted incentives. Buffett famously observed that he had yet to see a CEO eager to make an acquisition bring in an informed critic to argue the other side. [boardmember.com]

There are obvious reasons for this. CEOs can gain prestige and influence from running larger companies. Investment bankers are generally compensated for completing transactions. Management teams become psychologically invested in deals, and projections of synergies can make an expensive acquisition appear financially attractive.

Someone still needs to ask whether the deal is actually good for the owners.

This is why the board’s willingness to say no matters so much. The value of a director may not be apparent during fifty routine meetings. It may become apparent during one meeting in which everyone wants something to happen and one person has the judgment and courage to explain why it shouldn’t.

Capital Allocation Is Corporate Governance

Buffett’s skepticism about acquisitions points toward a broader idea that deserves more attention: capital allocation is one of a CEO’s most important governance responsibilities.

A chief executive effectively has two jobs. One is running the business. The other is deciding what happens to the cash that business produces.

The money can be reinvested in existing operations, used to acquire another company, spent repurchasing shares, used to reduce debt, distributed as dividends, or retained. Over a long enough period, those choices can be more consequential to shareholders than many operating decisions.

An outstanding company can generate enormous amounts of cash and still become a disappointing investment if management repeatedly uses that money to overpay for acquisitions. Conversely, a mature business with fewer opportunities for internal growth can create substantial shareholder value if its leaders allocate excess capital intelligently.

This is where Buffett’s insistence on measuring progress on a per-share basis becomes so important. Management should not ask merely whether an acquisition will increase revenue or earnings. Directors should ask whether the transaction will increase the long-term intrinsic value of each share. [berkshireh...thaway.com], [berkshireh...thaway.com]

The distinction is between building a larger company and building a more valuable investment.

Seen through this lens, capital allocation isn’t simply the province of finance departments or investment professionals. It is corporate governance. The capital belongs economically to the shareholders, and management has been entrusted with deciding how to deploy it.

Trust Is Not Passivity

This philosophy also helps explain why Buffett generally didn’t behave like a modern activist investor despite possessing nearly everything necessary to become a formidable one. He had capital, credibility, large ownership positions, access to CEOs, extensive boardroom experience, and eventually a corporate structure capable of buying entire companies.

The activist investor often begins with the proposition that a company could become more valuable if something changed. Buffett’s mature investment philosophy increasingly preferred exceptional businesses run by people he already trusted, where such intervention wouldn’t be necessary.

The activist asks: What should we change? Buffett increasingly asked: Who can we trust?

But Buffett’s willingness to trust management shouldn’t be confused with an unwillingness to intervene. His experience with Salomon Brothers makes that clear. Berkshire Hathaway invested $700 million in Salomon preferred stock in 1987, initially as a financial investment. After a Treasury-auction scandal threatened the institution in 1991, Buffett stepped in as interim chairman and became intensely involved in dealing with the crisis and regulators. [chian.io]

Salomon reveals an important boundary in Buffett’s philosophy. Managerial autonomy was conditional on integrity. Buffett could tolerate business mistakes in a way he would not tolerate violations of trust or threats to a company’s reputation. His intervention at Salomon demonstrated that the same investor who preferred leaving excellent managers alone could become extraordinarily active when the circumstances justified it. [chian.io]

This is why Buffett’s philosophy might best be described as minimum necessary governance. Not weak governance. Not passive governance. Minimum necessary governance: intervene as little as possible, but as much as required.

The distinction matters because activity is easy to mistake for effectiveness. A board can hold countless meetings, review hundreds of slides, employ prestigious consultants, maintain beautifully constructed committees, and still approve an acquisition that destroys billions of dollars of shareholder value. Another board may interfere very little in the company’s everyday operations but stop that acquisition.

Which board provided better governance? Buffett’s philosophy points toward the latter. What matters isn’t how frequently directors intervene, but the quality of their judgment when intervention becomes necessary.

Can Your Board Say “We Were Wrong”?

Perhaps the most revealing expression of Buffett’s governance philosophy appeared remarkably late in his career.

In Berkshire’s 2024 shareholder letter, Buffett reflected on his experience as a director of large public companies. At some of those companies, he said, words such as “mistake” or “wrong” were effectively taboo in board meetings or analyst calls.

“That taboo, implying managerial perfection, always made me nervous,” he wrote. [berkshireh...thaway.com]

It’s difficult to imagine a better test of corporate culture. Every company makes mistakes. Every CEO makes mistakes. Every board makes mistakes. Every investor, including Buffett, makes mistakes. A company that never acknowledges one hasn’t necessarily eliminated them. It may simply have eliminated the ability to discuss them honestly.

That can become dangerous very quickly. Errors become decisions that must be defended. Bad acquisitions become good acquisitions that supposedly need more time. Failing strategies become strategies the market hasn’t yet understood. Executives gradually become more concerned with defending yesterday’s decisions than evaluating today’s facts.

Buffett repeatedly acknowledged his own errors, including mistakes in choosing businesses and assessing managers. His larger point was that the real danger isn’t making mistakes. It is failing to correct them. [berkshireh...thaway.com]

Candor is a governance mechanism.

An organization cannot correct a problem it isn’t culturally permitted to acknowledge. And a board that cannot comfortably tell management “we were wrong” may possess all the formal characteristics of good governance while lacking one of the most important ones.

The Buffett Governance Test

Buffett never presented his ideas in exactly this format, but his writings suggest a useful way to evaluate a board. Instead of beginning with the usual checklist of committee structures and formal independence, an investor might ask five broader questions.

Ownership: Do the directors think and behave like owners? Do they have meaningful incentives to care about long-term per-share value rather than simply preserving their positions?

Selection: Has the board chosen a CEO whose ability and integrity justify substantial autonomy? If directors believe the CEO requires constant supervision, the deeper governance problem may be the CEO rather than the supervision.

Capital allocation: Does management distinguish between making the company larger and creating more value per share? How intelligently does it reinvest earnings, evaluate acquisitions, repurchase shares, manage debt, or return capital to owners?

Courage: Is there someone in the boardroom willing to tell a powerful CEO that a beloved acquisition is a terrible idea? Formal independence has limited value if nobody is prepared to disagree when the stakes are high.

Candor: Can management and directors comfortably say, “We were wrong”? If they cannot, mistakes are likely to survive well beyond the point at which they should have been corrected.

These questions are difficult to reduce to governance scores because they measure something deeper than structure. They attempt to measure culture, judgment, incentives, and character.

Rules Cannot Manufacture Character

This may ultimately be the most important lesson in Buffett’s approach to corporate governance. Companies can adopt more rules, refine definitions of independence, establish additional committees, hire governance consultants, and require more disclosure. Many of those mechanisms are valuable. But there are limits to what structure can accomplish.

You can write rules governing conflicts of interest, but you cannot write a regulation requiring courage. You can mandate disclosure, but you cannot mandate candor. You can establish a formally independent board, but you cannot guarantee independence of mind.

And you cannot manufacture integrity.

Buffett’s approach therefore rested on something simultaneously simpler and harder: choose the right people, align their interests with owners, give them enough freedom to exercise their judgment, measure them by long-term per-share value creation, and create a culture in which uncomfortable truths can be spoken. Then preserve the ability to act decisively when trust is broken.

That is the paradox at the center of Buffett’s case for less corporate governance. The objective isn’t less accountability. It is less unnecessary intervention supported by much stronger accountability where it actually matters.

Buffett did not build his system around constantly controlling managers. He tried to select managers who didn’t need to be controlled, while maintaining the ownership, candor, judgment, and courage necessary to confront them when circumstances demanded it.

That’s not weak governance. It may be governance at its strongest.

Sources

• Berkshire Hathaway, 1983 shareholder letter, on shareholders as partners, director ownership, and per-share intrinsic value. [berkshireh...thaway.com]

• Berkshire Hathaway, 1997 shareholder letter, on intrinsic business value and owner-oriented principles. [berkshireh...thaway.com]

• Berkshire Hathaway, 2024 shareholder letter, on mistakes, managers, candor, and boardroom culture. [berkshireh...thaway.com]

• Corporate Board Member, discussion of Buffett’s views regarding CEOs, directors, and acquisitions. [boardmember.com]

• GuruFocus, discussion of Buffett’s 2004 shareholder letter and director independence. [gurufocus.com]

• Account of Buffett’s involvement with Salomon Brothers during its governance crisis. [chian.io]