It's peculiar that we celebrate stories about the land of opportunity while we also take a perverse pleasure in plastering bull's 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.
One such controversy for Berkshire Hathaway (NYSE: BRK.A, BRK.B) and its CEO was Buffett's investment in Goldman Sachs (NYSE: GS) during the 2008 financial crisis and his ongoing public support for the company and its management.
No one accused Buffett of any wrongdoing beyond supporting a management team that, given the time, was unpopular.
- The SEC investigated Buffett's company Blue Chip Stamps for its role in the acquisition of Wesco.
- Warren Buffett prevailed against anti-trust charges related to his acquisition of the Buffalo Evening News.
- Buffett became embroiled in a serious move by the U.S. Treasury against the investment banking firm Salomon Brothers.
- Berkshire Hathaway's charitable giving efforts were halted by Buffett after the media assailed it for donations to pro-choice organizations.
- Buffett has been criticized for having a board of directors that's seen as too friendly and not independent.
The Early Years
Warren Buffett's first brush with controversy occurred during the acquisition of Wesco in 1974. In brief, Buffett and his partner, Charlie Munger, began acquiring Wesco Financial shares in 1972 via the company, Blue Chip Stamps.
The two worked hard to stop 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 Securities and Exchange Commission (SEC) investigated this deal (and Buffett's investment practices in general). It obtained a consent decree from Blue Chip Stamps that extracted a $115,000 payout for Wesco shareholders to compensate them for damages inflicted by the maneuver.
Buffalo Evening News
Buffett also found himself the target of antitrust charges when he acquired the Buffalo Evening News in 1977.
Buffett and the Evening News prevailed in the legal proceedings. Moreover, the antitrust action seemed like rival newspaper Buffalo Courier-Express' desperate attempt to use the courts to take out its competition. It was a stressful time and Buffett was accused of failing to respect prior gentlemen's agreements.
The Middle Period
One of the most serious controversies involving Warren Buffett occurred in 1990. In 1987, Berkshire Hathaway had acquired a 12% interest in the investment banking firm of Salomon Brothers.
In 1990, the news came out that a rogue trader had submitted bids in excess of Treasury rules and CEO John Gutfreund had failed to take disciplinary action.
The U.S. government threatened to hold Salomon accountable. Buffett stepped into the breach. He directly intervened with the Treasury department to reverse a ban on Salomon bidding in government bond auctions. Such a ban would have crippled the investment bank.
Buffett also stepped in to run Salomon Brothers for a time. Despite a $290 million fine levied on Salomon, Berkshire Hathaway ultimately saw its stake more than double when Travelers Group bought Salomon in 1997.
Berkshire Hathaway's Charitable Giving
Berkshire Hathaway has also experienced controversy due to its former charitable giving practices. 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 decided that shareholders of the company could allocate their proportionate share of the company's giving to the charitable organizations that they deemed worthy.
Some shareholders elected to contribute to various pro-choice organizations. This inflamed some conservatives who, in turn, organized negative public relations (PR) campaigns and boycotts against certain Berkshire Hathaway businesses.
Most notable of these was The Pampered Chef, which relied upon a direct sales business model akin to Avon. In response to the controversy, Buffett ended Berkshire Hathaway's shareholder-designated contributions program.
Berkshire Hathaway invested $5 billion in Goldman Sachs preferred stock during the 2008 financial crisis. When Goldman redeemed it in 2011, Berkshire made $3.7 billion. Warren Buffett believed that the stock purchase signaled confidence not just in the country's financial institutions. It showed that the U.S. business community would take crucial action when the U.S. government wouldn't.
The charges in 2006 against Berkshire Hathaway subsidiary General Re were more serious. It was claimed that General Re cooperated with AIG to engage in finite reinsurance.
Finite reinsurance was not insurance per se (with a corresponding transfer of risk). It was more of an accounting gimmick that allowed a company such as AIG to buff the appearance of its financial reports for a period of time.
The government aggressively pursued AIG and its chair at the time, Hank Greenberg. Berkshire Hathaway did not escape unscathed. The company paid a $92 million settlement and promised some changes to corporate governance practices.
Commentators had more reasons to criticize Buffett during the 2008 financial crisis and ensuing recession. Berkshire Hathaway made several investments during that recession and period of credit crisis that were very advantageous for Berkshire. While these deals reflected the costs of doing business at the time, critics have carped that they were exploitative.
A Charge With Bite
One ongoing controversy that can be appreciated in particular involves corporate governance and the independence of the board of directors of Berkshire Hathaway. It's difficult to call this an independent board because many of its members are long-standing friends of Warren Buffett, Charlie Munger, or both.
Buffett is the majority owner of the company. He wants directors with whom he is comfortable and who have the patient investment 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.
Who Is Charlie Munger?
Charlie Munger is the vice chair of Berkshire Hathaway and long-time friend and business partner of Warren Buffett. Munger and Buffett have run Berkshire Hathaway together since 1978.
Is Berkshire Hathaway's Board Considered Independent Now?
According to New York Stock Exchange (NYSE) rules it is. The NYSE requires that a majority of directors on the boards of listed companies be independent. To be independent, a director must not have a material relationship (e.g., be an employee, be a family member of owner, etc.) with the listed company or be part of an organization affiliated with the company. With the imminent election to the board of Wally Weitz (Weitz Investment Management), the majority of Berkshire's board will be independent.
How Has the Wells Fargo Scandal Affected Warren Buffett?
Berkshire Hathaway has been an investor in Wells Fargo for years. When Wells Fargo got caught up in its own unfortunate behavior, Berkshire shareholders became concerned for Berkshire's reputation. As a result, Buffett started selling shares of Wells Fargo in 2019. It sold its last shares in May 2022.
The Bottom Line
Given the scope and scale of Buffett's business plus the long period of time that he's been active as an investor and businessman, he's probably fared quite well, as far as controversies go.
What stands out is how often the aforementioned controversies had little or nothing to do with him personally. They likely became attached to him only because of his renown.
Warren 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. On the contrary, Buffett steps up and accepts it. All things considered, most shareholders would be lucky to have a CEO who behaves in such a way.