Risk & Compliance

Do Buffett’s Compliance Lapses Show Management Flaws?

After Berkshire Hathaway misses regulatory filing deadlines, it's fair to ask whether his governance style meshes with today's compliance culture.
Iris DorbianAugust 22, 2014
Do Buffett’s Compliance Lapses Show Management Flaws?

Even investing gurus like Warren Buffett are capable of oversight errors. Buffett’s Berkshire Hathaway failed simple compliance rules by missing deadline filings for investments in specialty chemicals giant Dow Chemical and construction materials provider USG Corp., Bloomberg reported. The latter lapse resulted in an $896,000 fine.

Regulatory deadlines aren't the only thing on Buffet's mind.

Regulatory deadlines aren’t the only thing on Buffett’s mind.

Though Buffett has long prided himself on running his company with a small core staff, the compliance errors raise a question as to “whether his management approach is suited to an era of increased reporting requirements,” Bloomberg wrote.

Brian Tayan, a researcher at Stanford Graduate School of Business, blamed these slip-ups on “growing pains that come from having a trust-based culture in a world that requires compliance procedures.” In the end, investors will just have to decide if the compliance errors mean anything to them, he told Bloomberg.

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The missed filings are not without precedent. Bloomberg noted that in the last two years, Berkshire Hathaway also missed deadlines for filing reports with the U.S. Securities and Exchange Commission about investments in DirecTV, Liberty Media Corp and Wabco Holdings Inc. Also, Berkshire’s filing about an investment in M&T Bank Corp. was three years late, according to Bloomberg.

Buffett’s business partner Charles Munger, vice chairman of Berkshire, has done the same, Bloomberg noted. Following a disagreement with former auditor Ernst & Young, Munger’s Daily Journal Corp., the legal publisher, missed SEC deadlines for its annual report as well as two quarterly filings.

Last year the Federal Trade Commission complained that Berkshire did not file a report about its investment in Symetra Financial Corp., but stated that it wouldn’t recommend a penalty.” That changed, however, when Berkshire did not file a report about the USG holding. Still, as Bloomberg pointed out, the fine over USG was only a “fraction of what other large financial companies have paid in recent years to settle probes tied to the housing market collapse, interest-rate rigging and money laundering.”

One observer, Lawrence Cunningham, author of a soon-to-be-released book, “Berkshire Beyond Buffet,” said Buffet should not be immune to penalties simply because of his industry stature and renown.

“You can’t just rely on your reputation,” the George Washington University law professor told Bloomberg. “If you make a mistake, you’ve got to pay.”

In a recent statement, Buffett owned up to Berkshire’s failure to file a report about the USG holding. But he did not respond to Bloomberg’s request for comments about his plans to prevent future compliance mistakes.

Source: Buffett’s Lapses Highlight Growing Pains with Compliance

Photo: Pete Souza, Executive Office of the President of the United States

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