It is a peculiar American trait that we celebrate stories about the "land of opportunity," yet we also take a perverse pleasure in plastering bulls eyes to the backsides of the very wealthy. As one of the wealthiest people in the world, it is no surprise that the much-heralded investor Warren Buffett has had his share of controversies over the years.
The latest PR crisis for the Berkshire Hathaway CEO is his investment in Goldman Sachs and his ongoing public support for the company and its management.
No one has thus far accused Buffett of any wrongdoing, beyond continuing to support a management team that is quite unpopular at present.
The early years
Buffett's first brush with controversy occurred as part of the acquisition of Wesco in 1974. In brief, Buffett and his partner Charlie Munger began acquiring Wesco Financial shares in 1972 via Blue Chip. The two ultimately worked hard to break up a proposed acquisition of Wesco by Financial Corp. in 1973 and then spent the next two years acquiring a majority stake in Wesco. Ultimately, the SEC investigated this deal (and Buffett's investment practices in general), obtained a consent decree from Blue Chip and extracted a $115,000 US payout from Blue Chip to Wesco shareholders for damages the SEC believed were inflicted by this maneuver.
Buffett also found himself the target of antitrust charges when he acquired the Buffalo Evening News in 1977. Although Buffet and the Evening News ultimately prevailed, and the antitrust proceedings seemed more like a rival's (the Buffalo Courier-Express) desperate maneuvers to use the courts to compete, it was a strenuous time and accusations were made that Buffett failed to respect prior "gentlemans' agreements."
The middle period
One of the most serious controversies involving Warren Buffett occurred in 1990. Berkshire Hathaway had acquired a 12 per cent interest in the investment bank Salomon Brothers in 1987, and news came out in 1990 that a rogue trader had submitted bids in excess of Treasury rules and that the CEO at the time (John Gutfreund) had failed to discipline the trader.
The U.S. government threatened to come down hard on Salomon, and Buffett stepped into the breach. He directly intervened with the Treasury department to quickly reverse a ban on Salomon bidding in government bond auctions, a move that would have crippled the investment bank. He also stepped in to run the bank for a time, and despite a $290 million fine levied on Salomon, Berkshire Hathaway ultimately saw its stake more than double when Travelers bought Salomon in 1997.
Berkshire Hathaway also derived some surprising controversy from its former charitable giving practices. Unlike the large majority of companies, Buffett believed that it was inappropriate for a company to direct its charitable giving to the pet causes of the board of directors. Instead, he established a system whereby shareholders of the company could allocate their proportionate share of the company's giving to go to whatever charitable organizations they deemed fit.
Some shareholders elected to have their contributions made to various pro-choice organizations, and this inflamed some Conservatives who, in turn, organized negative PR campaigns and boycotts against certain Berkshire Hathaway businesses (most notably The Pampered Chef, which relied upon a direct sales business model akin to Avon). In response to the controversy, Buffett elected to end the charitable giving campaign.
More serious were the charges in 2006 against Berkshire Hathaway subsidiary General Re that it had cooperated with AIG in engaging in so-called finite reinsurance. Finite reinsurance was not really insurance per se (with a corresponding transfer of risk), but more of an accounting gimmick that allowed a company like AIG to buff the appearance of its financial reports for a period of time. While the government aggressively pursued AIG and its chairman at the time, Hank Greenburg, Berkshire Hathaway did not escape unscathed. The company paid a $92 million settlement and promised some changes to corporate governance practices.
Recent events have given commentators more reasons to criticize Buffett. Berkshire Hathaway made several opportunistic investments amidst the depths of the recession and credit crisis on terms that were very advantageous to Berkshire. While these deals reflected the costs of doing business that prevailed at the time, critics have carped that these deals are "exploitative."
A charge with bite
If there is one ongoing controversy around Warren Buffett that can be appreciated, it is in the area of corporate governance. If you look at the board of directors of Berkshire Hathaway, it is difficult to call this an independent board, as many of its members have been long-standing friends of Warren Buffett, Charlie Munger, or both. Warren Buffett is the majority owner of the company, and he wants to work with people with whom he is comfortable, and who he believes shares the same sort of patient outlook that he prefers. Nevertheless, it does not change the fact that as a public company, there is an obligation to shareholders to have a strong independent board of directors.
The bottom line
Given the scope and scale of Buffett's business, and the long period of time he has been active as an investor and businessman, he actually comes out quite good. What stands out most is how often these supposed "controversies" had little or nothing to do with him personally, and likely only became attached to him because of his renown. Buffett has always said that he is a hands-off manager who trusts his employees. What's more, he has not attempted to shift or redirect blame; when things go wrong, he steps up and takes the blame. All things considered, most shareholders would be lucky to have a CEO who acts likewise.