When it comes to outspoken bluntness, Berkshire Hathaway Chairman and CEO Warren Buffett has nothing on his No. 2 man, Charlie Munger.
Munger, Berkshire's vice chairman, spoke Monday at the Stanford Law School Directors College, a two-day educational conference for corporate directors.
Speaking the day after Securities and Exchange Commission Chairman William Donaldson, who gave a sober speech befitting a bureaucrat, Munger told off-color jokes one minute and waxed philosophical the next.
He took potshots at proxy-advice firm Institutional Shareholder Services, whose vice chairman Jamie Heard was in the audience; at trial lawyer Bill Lerach, also a keynote speaker; and at public pension funds and the unions that, in Munger's mind, control them. He argued against initiatives that Donaldson pleaded for in his speech. And without naming names, he scolded corporate directors, who made up the bulk of the audience.
Munger said corporate directors and executives are paid too much for doing too little, thanks to a "daisy chain of reciprocity" in which "everybody has to match the worst that is available."
Directors, he said, are brought decisions that have already been made by management, and are too polite to protest. "It's like belching at the party to raise any objection," said Munger, who is a Berkshire officer and director.
This is the 10th year Stanford Law School has hosted the college, but the first time it has granted press access, albeit limited to keynote speeches.
Stanford enrolled 215 participants this year, up from 110 last year. Most are independent directors of public companies who come to learn more about their increasingly complex and risky jobs. The crowd was overwhelmingly white, male and over 50.
The main topics of discussion this year, according to Stanford Law School professor and conference organizer Joseph Grundfest, are litigation, compensation and accounting/auditing.
Munger, 80, has a special connection with Stanford: his wife Nancy and five of their six children attended as undergrads and one graduated from Stanford Law.
Directors as exemplars
Seated beside the podium, Munger repeatedly urged directors to think of themselves as exemplars and even suggested they serve without pay like a leitourgos in ancient Athens. A leitourgos was a wealthy citizen who performed public duties at his own expense.
He pointed out that officers of the Mormon Church (below the top leadership) are volunteers and give 10 percent of their income to the church.
"We want people who give more than they get," he said.
Munger would like to see a new securities law similar to the military law that prohibits conduct unbecoming an officer.
"People ought to know that banging the stewardess on the corporate airplane ... is conduct unbecoming," he said.
While it's hard for juries to understand complex corporate crime, it would be easy for them to understand this one. But, he said, "It's not going to happen."
Munger is less enthusiastic about the Sarbanes-Oxley Act, or Sox, which created new rules to combat corporate fraud.
Munger said the benefits of Sox will barely cover the cost of compliance and won't change corporate culture significantly.
Donaldson, in his speech, had an opposite viewpoint.
"The enactment of Sarbanes-Oxley marked the beginning of a new era for American business," the SEC chairman said.
He admitted there is "a lot of bureaucratic Mickey Mouse" but called the cost of Sox-compliance a "rounding error" for big firms.
"On the small company end, there is a disproportionate cost. We are going to take a look at that," he said.
Donaldson compared the costs to the startup expenses businesses incur to reap big rewards down the line. In this case, the benefits supposedly will be more-believable earnings, which will produce loftier price-earnings multiples and higher stock prices.
Donaldson's most impassioned plea came for a compromise in the heated proxy-access battle.
The SEC has proposed a new rule that would, in rare circumstances, make it easier for large shareholders to nominate directors through the proxy process.
Shareholder advocates say the proposal doesn't go far enough. Some business groups have said it would threaten the economic recovery and impair American competitiveness.
"The escalating, shrill and fearful rhetoric on all sides of this issue has drowned out thoughtful discourse and comment," Donaldson said.
"We will not be forced to act in the face of an artificial deadline. However, after 60 years of repeated commission consideration of this topic, the time has come for sensible, balanced and constructive debate leading to action designed to improve our proxy process for the nomination of directors," he added.
Munger, on the other hand, said he opposes any new rules that could make it easier for shareholders to launch an unfriendly takeover, and that includes the SEC's proposal.
"I would be leery of making any change that increases the chances we bring back the Predators' Ball," he said, referring to hostile takeovers in the 1980s.
"Let's assume we give more power to public pension funds (which are large shareholders that could gain a larger role in nominating directors). They tend to be controlled by the unions," he said. Munger then accused municipal- employee unions of various kinds of wrongdoing including crooked accounting, which "they copied from the corporate sector."
Criticism of ISS
Munger also lashed out at Institutional Shareholder Services, which advises large investors how to vote in corporate elections. ISS has given Berkshire Hathaway very low marks for corporate governance, mainly because, according to ISS, its board lacks enough truly independent directors.
On a scale of 1 to 100, with 100 being the best, ISS gave Berkshire a 5.2 when it was compared with all companies and a 3.2 when compared with its peers.
Munger admitted that Berkshire's board is not "the correct model for the rest of America." But he criticized ISS for selling access to its ratings system to the companies it rates.
Heard, of ISS, pointed out that his company does not charge companies to be rated. However, companies can license ISS software to see how various changes in their corporate governance activities would affect their ISS ratings. If they make certain changes, their ratings may improve. But Heard said the revenue ISS gets from licensing does not affect how it rates companies.
Asked to comment on the plaintiffs bar (lawyers who file class-action securities suits), Munger said, "This is not a group you would want to marry into your family.
"That said, more than half the time the people being sued by the Lerach firm are guilty of outrageous conduct," Munger said. "The problem is, they don't mind (suing) the other half. They are an equal opportunity litigator." Lerach was not available for comment.
Munger did have a few kind words to say. He complimented Microsoft for replacing employee stock options with restricted stock and praised CEO Steve Ballmer, who once bought almost 1 million shares of Microsoft stock with his own money.
He also complimented Costco, where he is a director. "There is a lot that is good about Microsoft. There is a lot that is good about Costco," Munger said.