2004: How can employees figure out if their employer has a long-term perspective, honesty, and integrity?
AUDIENCE MEMBER: After reading this story on Enron, I would like to ask you the following question.
How does an entry-level employee in a large company find out if her employer operates with a long-term perspective, and with honesty and integrity?
WARREN BUFFETT: Well, that’s a very good question. I’m not sure I’m going to have an equally good answer. It —
You know, you pick up signals — or frequently, you can pick up some signals — about what is going on at the top of a business if you’re at a lower level. But I would say it would be very easy to be fooled on that subject.
Charlie and I would tend to be looking at things that they do in public in relation to their investors and the promises they make, and all of that sort of thing. But I think that might be tough for people, and it wouldn’t always give you a great guide.
I’ve — we’ve been suspicious of companies, for example, that place a whole lot of emphasis on the price of their stock.
I mean, when we see the price of a stock posted in the lobby of the headquarters or something, you know, things like that make us nervous. But I’m not so sure that’s, you know, that that would be enormously helpful.
So I guess you just have to sort of pick up from coworkers, publications, pronouncements of the leaders, the sort of culture that was being presented to them and the world, and, you know, you might get suspicious about it.
But I don’t think I have a really good answer for that, do you Charlie?
CHARLIE MUNGER: No, it’s obviously easy when you’ve got a caricature of a person like Bernie Ebbers or Kenny Lay. I think it’s easy to say that you’ve got almost a psychopath — (laughter) — in charge.
But what fools you is a place like Royal Dutch. If I’d been asked to guess —
WARREN BUFFETT: Ah!
CHARLIE MUNGER: — major companies with sound, long-term cultures, and a good engineering values, and so forth, Royal Dutch would have been near the top of my list.
And to have the oil reserves phonied for years, and internal reports of people who were tired of lying.
If it can happen at Royal Dutch, believe me, it can happen a lot of other places.
WARREN BUFFETT: Yeah, Charlie and I would not have spotted it at Royal Dutch by any of the means that we normally use.
In fact, we — as Charlie said, we might have used that as an example of some place that was almost certainly above reproach. And then you do read the emails and all that.
CHARLIE MUNGER: But we don’t learn, because I would still expect that Exxon’s figures were fair.
WARREN BUFFETT: Yeah.
I think you — what was — what transpired in the 1990s, you know, was this gradual — and later on, not so gradual — embracing at the top of the feeling that anything goes.
You know, I don’t — I’m not going to speculate as to the motives at the top of Shell.
But there was so much going on where people saw the fellows — in most cases fellows, unfortunately — that were at their clubs, that they saw at other corporate meetings, were respected business leaders, they saw just one after another that were really cutting corners in one way or another.
And, you know, situational ethics can take over in that. People do, I think, they sink faster to a lower prevailing morality than they rise to a higher prevailing morality.
But they do move in the direction of what they perceive to be the prevailing morality of those around them, in many cases. And certainly the corporate world in the late 1990s, particularly, it was extreme on that.
WARREN BUFFETT: And that leads me into — I ran into a friend at the lunch break who’s involved in these matters. And he suggested, and I’m delighted to put in a plug to encourage all of you to write your congressman and senators to give your views on whether stock options should be expensed, or whether indeed, whether Congress has got any business legislating on the question of what proper accounting is.
It was a disgrace some 10 years ago when the United States Senate essentially threatened the accounting standards board with extinction and bludgeoned Arthur Levitt, then running the SEC, at the behest of a lot of rich contributors, to declare that — to override the accounting standards board’s pronouncement that options should be treated as expense.
And it was — and I think in a very significant way, it accelerated the “anything goes” mentality of 1990s.
At that point, when Congress says it’s more important to have stock prices go up than it is to tell the truth, and they voted 88 to 9 in order to do it, as I remember, I think there was a shift in morality among many corporate executives.
You may remember that the FASB then backed off, but still said that expensing was preferable. And having said it was preferable, 498 out of the 500 companies in the S&P took the less preferable method.
All of the big auditing firms at that time endorsed their big clients’ views, in order to report higher earnings. Now, all four accounting firms say you should count them as expenses.
Well, they’re right, now, but it just shows what was going on in that period when, on a question of accounting principles, and when really nothing has changed, when what were then five — the Big Five —have shifted 100 percent to where the Big Four are now, and, now, they say options should be expensed.
So, if you are inclined to write your congressman or senator, tell him you really think the FASB knows more about accounting than they do. And I think you’ll be right.
If you want to have some fun, go to Google and type in two words. Type in the word “Indiana,” and type in the word “pi,” that’s the mathematical symbol pi. And when you do that, you’ll see a number of stories come up.
And they relayed how in 1897, at the instigation of one legislator who was responding to a constituent, the House in Indiana voted almost unanimously, it may have even been unanimously, it says what it was on Google, to change the value of pi. (Laughter)
I’m, you know, I’m not making this up. It’s checkable.
And it seems that there was a fellow that thought he’d discovered some new relationship between circumference and diameter, and area, and a few things. And it came out to 3.20 if you worked through his formula.
And he offered to give this royalty-free, as he put it, to the State of Indiana to teach its children so that they would have not only the truth, but they’d have an easier number to work with than the long decimal that heretofore had been thought of as pi.
Well, that passed the Indiana legislature. And it passed the House. By the time it got to the Senate, there were a few people that were still clinging to the old values who managed to shoot it down.
But I would submit that in the — in 1993, that the U.S. Senate cleansed the record of the Indiana legislature by outdoing them in attempting to change the rules on something, on a subject, they knew nothing about.
And I think some of the excesses of the 1990s that followed came about through the fact that they knew 88 senators were willing to declare the world was flat if constituents who had contributed enough money to them wanted it thus.
Let’s — we pause now, go back to our schedule here.
Number 3. Oh, Charlie, do you have anything to say about the Indiana legislature?
CHARLIE MUNGER: Well, I — the current members of Congress that want to retain the former abusive accounting, which are probably a majority of the House of Representatives, are way worse than the people who wanted to round pi to an even number.
Those people were stupid. (Laughter)
These people are mostly not stupid, but dishonorable. I mean, they know it’s wrong, and they want to do it anyway. (Applause)