2011: How does Berkshire handle compliance?
ANDREW ROSS SORKIN: The question is, “Can you explain the company’s policy for your own personal investing outside of Berkshire and that of your other managers, and why aren’t all trades in investments first cleared through a compliance department like that of most other companies?”
WARREN BUFFETT: Well, I don’t think it is true of most other companies.
We have 260,000 employees, and we have one company that’s a subsidiary of General Re called New England Asset Management, but that’s the only company that advises other people on investments or operates in the investment field.
At Berkshire, there are presently three people that can execute trades, and then there are a few other clerical people that would see what was done.
But we are not an investment advisory firm. We’re not a mutual fund or anything of the sort.
So if we — we have some, I think, pretty clear rules that are going to be looked at, again, I can assure you, by the audit committee.
But in terms of the Code of Conduct, Code of Ethics, and insider trading rules, which go to the managers, I don’t think there’s anything ambiguous in those.
Now, to extend those beyond — I don’t know, Marc, how many people those go to but — whether 60 or 70 or something, I’m not sure of the number — but the problem with rules, you know, is, I mean, you’ve got to have them and we emphasize not only the letter of them, but the spirit. That’s why I write that letter every couple years.
I was on the audit committee, for example, of Coca-Cola. And Coca-Cola has about one-fifth as many employees — or did then — had about 50,000 — had about one-fifth as many employees as Berkshire. And each time the audit committee met we had eight or 10 code violations.
I mean, people — if you take Berkshire at 260,000 people, you know, that’s about the number of households in the greater metropolitan Omaha. And perfect as we like to think we are in Omaha, I will tell you there’s a lot of things going on in Omaha right as we sit here that, you know, do not match the rules. So it’s a real problem.
The problem, obviously, with the Sokol thing is it hit very, very high up, you know.
But we had a case sometime back where a fellow that was a friend of mine, vice president of one of our subsidiaries, and, like I say, a personal friend, and we supplied the evidence that sent him to jail.
You know, it has happened. We had a — as I remember some years ago, I think it was in Woodbury, New York, we may have had a woman arrested in the offices just because we want to make very clear, you know, what — that we mean business and as the — as the audit committee said that this is not public relations, this is reality.
Here’s a letter that went out from Johns Manville. I didn’t know anything about it until Todd Raba gave it to me the other day, but it describes what — dated April 27, and it said, “The audit committee clearly found that Mr. Sokol compromised the integrity-related values of both Berkshire and JM have worked so hard to ingrain in the fabric of both companies.
“This should serve as a tragic lesson learned for every employee in JM.” And then in boldface, “There are no gray areas when it comes to integrity.” And it goes on.
So we hope to get some value out of this experience that will help us reinforce, with not only the 60 or 70 managers, but with 260,000 people that we do mean business on this, and we’ve showed them we mean business when we have sent more than one person to jail.
But there will be, you know, we can have all the records in the world and if somebody wants to trade outside them or something, you know, I — they’re not going to tell us they’re trading in their cousin’s name. I mean, you know, it just doesn’t work that way.
We will have occasions in the future when people do wrong things.
Usually they get handled at the subsidiary level. I mean, it’s somebody doing something, whether it’s getting a kickback from a vendor or stealing out of a cash register, whatever it may be, and then, you know, we get the occasional mega one, which is very painful.
But we will — if there’s anything we can do in the rules that will make it even more explicit or get across further the idea that rules are not made to be danced around but rather that the spirit of them extends beyond them, we want to be sure we do it.
CHARLIE MUNGER: Yeah, all that said, if you look at the greatest institutions in the world, they select very trustworthy people, and they trust them a lot. And it’s so much fun to be trusted. And there’s so much self-respect you get from it when you are trusted and are worthy of the trust, that I think your best compliance cultures are the ones which have this attitude of trust, and some of the ones with the biggest compliance departments, like Wall Street, have the most scandals.
So it’s not so simple that you can make your behavior better automatically just by making the compliance department bigger and bigger and bigger.
This general culture of trust is what works. And, you know, Berkshire hasn’t had that many scandals of consequence, and I don’t think we’re going to get huge numbers, either.