Bill Black: A Letter to Warren Buffett and Charlie Munger about Hiring Proven Whistleblowers

Lambert here: One of those sensible measures that just never seems to happen…

By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Originally published at New Economic Perspectives.

The Wall Street Journal recently published a summary of a study of “desired director traits.”

A survey of 369 supervisory directors from 12 countries by search and advisory firm Russell Reynolds Associates asked which behaviors they thought are most important to creating a board culture that drives effectiveness and company performance.

The Ideal Director’s Traits

The study found that the five most highly valued traits in a director are, in descending order:

  • Courage
  • Willing to constructively challenge management
  • Sound business judgment
  • Asking the right questions
  • Maintaining an independent perspective and avoiding “group think”

The first two traits are essentially the same – courage. Traits three through five are closely related to each other. The fifth has an element of courage as well, the courage to fend off “group think” and the CEO’s views and maintain an “independent perspective.”

Reality: CEOs Want Directors Who are “Sedated Chihuahuas”

I confess that I do not believe the study about the ideal director. More precisely, I do not believe that CEOs think directors with these traits are ideal. Indeed, I think these are precisely the traits that CEOs most fear. Warren Buffett agrees.

The typical corporation has a compensation committee, and believe me, they don’t ask Dobermans to be on it; rather, they want Chihuahuas who’ve been sedated.

It’s an unequal negotiation [between the board and the CEO]. The CEO really cares, but to the board, it’s play money.

How CEOs Can Prove Me (and Warren Buffett) Wrong

I would love to be proven wrong about the traits that CEOs value in directors. There is a simple, direct manner in which they could prove me wrong. The way that CEOs could prove me wrong would greatly improve the integrity and effectiveness of the firms they run, so this is a win-win-win.

Whistleblowers exemplify each of the five most useful traits. Two of my co-founders of Bank Whistleblowers United (BWU), Richard Bowen and Michael Winston should be among the most heavily recruited people in the world to become board members at Fortune 50 firms if the answers that the directors gave in the survey reflect the true views of CEOs.

Richard Bowen was a Citigroup SVP leading a team of hundreds of loan underwriters. His team found that the lenders selling Citigroup roughly $100 billion in mortgages annually were doing so through fraudulent “reps and warranties.” Citigroup then fraudulently resold the same mortgages, making the same type of reps and warranties about the loans that it knew to be false. Bowen warned Citigroup’s senior managers, including Bob Rubin, of this massive fraud and cautioned that it could create massive liability for Citigroup. Instead of acting to stop the massive fraud on which Bowen blew the whistle, Citi’s management attacked Bowen and ended his career at Citigroup. The fraud incidence grew to 80% because top management refused to heed Bowen’s warnings. Of course, their bonuses also grew because they refused to heed Bowen’s warnings.

Michael Winston was a C-suite level officer at Countrywide who blew the whistle on their loan underwriting fraud to the controlling managers, including the CEO. He warned that the practices would cause catastrophic losses. Countrywide’s (and then Bank of America’s) management destroyed his career at Countrywide and Bank of America.

Recall the top five traits of the ideal director.

  • Courage
  • Willing to constructively challenge management
  • Sound business judgment
  • Asking the right questions
  • Maintaining an independent perspective and avoiding “group think”

Bowen and Winston exemplify courage. They persisted in trying to protect their banks even when they knew that it was leading the bank’s managers to destroy their careers. They “challenged management” “constructively” at the highest level. Their business judgments were correct both in terms of the bank’s safety and soundness and integrity. They blew the whistle because they “asked the right questions” – and acted properly on the answers they got. They were overwhelmed by senior managers who embodied a toxic “group think” that led to harmful and dishonest business practices. Even under immense pressure to conform, including the destruction of their careers, they maintained “an independent perspective.” They spoke truth to power.

Bowen and Winston consistently acted in the best interests of the bank even when they knew that the controlling management was harming the bank in order to benefit the top managers. Lots of managers and directors brag about how tough they are. Bowen and Winston went through the crucible and revealed that their spines were forged out of the strongest and most indestructible of metal alloys formed by that crucible. They do not brag. They simply walk the walk.

CEOs are All Talk About Wanting Courageous Directors

In economics, we are taught to focus on “revealed preferences” – what you actually do, not what you say, reveals your true beliefs. Not a single CEO has asked Bowen and Winston to serve as directors. I am, of course, only using Bowen and Winston as examples of the hundreds of whistleblowers who have proven themselves to be off the charts on these five ideal traits. Like Bowen and Winston, the vast majority of senior financial whistleblowers are unemployable in finance precisely because they exemplify the top five traits directors are supposed to possess.

Will Mr. Buffett and Mr. Munger Reveal Their True Preferences?

In order to recover from their scandals, Wells Fargo and Moody’s desperately need independent directors and senior managers that exemplify these five ideal traits. In both scandals not a single director or top manager displayed the five ideal traits. Warren Buffett’s firm, Berkshire Hathaway, effectively controls both of these firms. Buffett and Charlie Munger, his top colleague who shares Buffett’s disdain for directors who are “sedated Chihuahuas,” can signal (1) that they seriously intend to clean up the scandals at both of the leading firms in the field of finance and (2) will no longer tolerate filling the top managerial and board of directors ranks of both firms with sedated Chihuahuas.

Neither Bowen or Winston will act like a “Doberman.” Both gentlemen have a calm, polite style. Neither seeks to intimidate, much less snarl. But they are people of proven integrity, courage, and skill. They were forced out because they were correct in their warnings and were devoted to the best interests of their firms and their customers. They were forced out because they spoke truth to power.

Mr. Buffett and Mr. Munger, you have enormous accomplishments. It is time to reveal your true preferences and serve as corporate leaders setting a path that is good for firms and whistleblowers. I would be happy to put you in touch with Mr. Bowen and Mr. Winston. You would not be doing them a favor by hiring them for top positions. They have proved their exceptional worth. They are everything you say you want in a senior manager or director. They are your kind of people, and you will be proud, as I am, if you become their colleagues and friends and you will be delighted by the contributions they make. It is a tragic, insane waste to take the people who have demonstrated the ideal traits of managers and directors – and render them unemployable in such roles.

5 Responses

  1. Dissension is career death in any corporation. The tone of a company is set at the top and is monolithic , the nail that sticks up will get hammered down or pulled out and tossed… when that tone is “anything goes” we get this result.

  2. To Bowen and Winston or to buffet and munger?

  3. I stood up to both of them as an appraiser and homeowner and they ruined everything in my life. Corporate Bullies. No regard for human beings.

  4. Why not Bowen for Secretary of Treasury?

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