2010: How would Buffett intervene in an unethical or illegal situation at a Berkshire subsidiary?

AUDIENCE MEMBER: Thank you. My name is Joe Bob Hitchcock. I’m a winemaker from the Napa Valley in California.

I would like to suggest that the next time you and Charlie have a steak at Gorat’s that you accompany it with a new health food, a Napa Valley red wine. (Laughter)

WARREN BUFFETT: We just went in the wine distribution business, as you may know. (Laughs)

AUDIENCE MEMBER: Excellent.

CHARLIE MUNGER: Warren is helpless, but I’m with you.

AUDIENCE MEMBER: OK. (Laughter)

I’ll send you a bottle.

One of the keys to the success of Berkshire is your policy to allow the managers of the various Berkshire Hathaway companies to operate with minimal interference from Omaha.

But if you became aware of unethical or illegal activities at a Berkshire Hathaway-owned company, would you directly and personally intervene?

WARREN BUFFETT: Sure. We have to jump in.

We have a hotline, which I think was a very good invention of — it wasn’t an invention, but a good policy embodied in Sarbanes-Oxley. And, you know, that’s been a plus to us. I get letters directly sometimes.

So I want to hear about problems. I hope somebody else has heard about them first and already gotten them solved, but if they don’t get solved someplace else, I want to hear about them.

And we have an internal audit function, which is important at Berkshire. And anything that comes in, you know, when somebody calls in on the complaint line and says, “The guy works next to me has bad breath,” I tend to skip over those.

But if anything comes in that relates to alleged bad behavior, it’s going to get investigated at Berkshire. And it does.

And every now and then, there have been some important transgressions that have come to us via either letters to me, or calls on the hotline, or maybe letters to the audit committee, whatever. We encourage that.

Charlie?

CHARLIE MUNGER: Yeah. We care more about that than business mistakes, way more.

WARREN BUFFETT: We have a letter that goes out every roughly two years; it’s the only communication. I probably ought to put a copy of it in the annual report sometime so that the shareholders see it.

But it’s a page and a half long. It asks the manager to tell me who, if something happened to them that night, who I should consider putting in charge of the place the next day.

Doesn’t mean I’ll follow their advice, but I want to know their reasons and the pluses and minuses.

But it starts off basically and it says, “Look, we’ve got all the money we need.” We’d like to make more money. We love making money.

But we don’t have a shred more reputation than we need, and we won’t trade reputation for money.

And we want that message to get out. It’s the reason we stick that Salomon thing in the movie every year. I mean, you can — probably some of you can recite it by now, but I don’t think it can hurt to keep repeating that story.

And the one thing we tell — we tell them that message, and then I’ve added a new line in this. And I say, if the reason you’re doing something, the best reason you can come up with, is that the other guy is doing it, it’s not good enough.

There’s must be — there’s got to be some other reason besides, “The other fellow’s doing it,” or you’re in trouble. And I tell them, “Call me if anything’s questionable. You think it’s close to the line, give me a call.”

By saying that, nobody gives me a call because they — (laughs) — they know that the very fact that they think it’s that close to the line probably tells them it’s over the line.

But I want to hear about stuff. We can cure any problem if we hear about it soon enough and take action soon enough. But if it’s allowed to fester out someplace and people cover it up — and sometimes they have — then we’ve got a problem.

And we will have more of that in the future, there’s no getting around it, you know. If you have 260,000 people, there can be some things going on. I just hope we hear about them fast.

And I hope their managers hear about them even faster and do something before it even gets to us. But we want very much to protect the reputation of Berkshire. It’s the right thing to do.

Charlie?

CHARLIE MUNGER: Well, it is absolutely essential. And Berkshire, averaged out, has a very good reputation, as you can tell by the ratings from major media and surveys.

And that is absolutely precious to us. In a sense, you people are part of the culture, too.

The ideal is not to just make all the money that can be legally be made without causing too much legal trouble. The idea is bigger than that. It’s that we celebrate wealth only when it’s been fairly won and wisely used.

And if that idea pervades the culture of a place, including the shareholders, we think that’s very helpful to us. (Applause)