A review of Buffett's commentary on accounting, governance, and investing practices: does he “walk the talk”?

• Date: 01 September 2018
• Published date: 01 September 2018
• Author: Robert M. Bowen,Shivaram Rajgopal,Mohan Venkatachalam
• DOI: http://doi.org/10.1111/jacf.12310

IN THIS ISSUE:

Special Issue on

Growth and

Innovation

8e Dynamism of Nations: Toward a eory of Indigenous Innovation

Edmund Phelps, Columbia University

27 Management’s Key Responsibility

Bartley J. Madden, Independent

36 Funding Strategies in a Rising Interest Rate and a Flattening Yield

Curve Environment

Niso Abuaf, Clinical Professor of Financial Economics, Pace University;

and Chief Economist and Strategist, Samuel A. Ramirez and Co.

47 Financing Urban Revitalization: A Pro-Growth Template

Steve H. Hanke, The Johns Hopkins University and Stephen J.K. Walters,

Loyola University Maryland

55 A review of Buett’s commentar y on accounting, governance, and

investing practices: does he “walk the talk”?

Robert M. Bowen, University of San Diego and the University of Washington; Shivaram Rajgopal,

Columbia Business School; and Mohan Venkatachalam, Duke University

VOLUME 30

NUMBER 3

SPECIAL ISSUE 2018

A P PLIED

COR P O R ATE FINANC E

Journal of

55

Journal of Applied Corporate Finance • Volume 30 Number 3 Special Issue on Growth and Innovation 2018

Understandably, many nancial professionals and laypeo-

ple seek to understand his investing philosophy. A search of

Amazon.com for books relating to “Warren Buett” yields

hundreds of volumes. e annual reports of Berkshire Hath-

away and particularly the Chairman’s Letter’s therein, are

widely read among investors and nancial journalists. In

these documents, Buett oers incisive opinions on corpo-

rate governance, accounting, valuation methodology, and

market trends.

ere is already much scholarly literature on the kinds

of investments that large American pension funds such as

CalPERS and TIAA-CREF make with the intention of

improving corporate governance and whether those pension

fund actions aect subsequent operating and stock return

performance of the targeted firms.¹ However, pension

funds nd it challenging to be active investors because they

themselves (i) suer from agency problems with respect to

their beneciaries, (ii) churn their portfolios too often and sell

their holdings in a poorly governed rm rather than stay and

x governance problems, (iii) lack long-term stable relation-

*This article is based upon a 2014 article in the The Accounting Review. See Robert

M. Bowen, Shivaram Rajgopal, and Mohan Venkatachalam, “Is Warren Buffett’s Com-

mentary on Accounting, Governance, and Investing Practices Reected in the Investment

Decisions and Subsequent Inuence of Berkshire Hathaway?” The Accounting Review:

September 2014, Vol. 89, No. 5, pp. 1609-1644. https://doi.org/10.2308/accr-50797

1 Willard T. Carleton, James M. Nelson, and Michael Weisbach, 1998, “The Inu-

ence of Institutions on Corporate Governance through Private Negotiations: Evidence

from TIAA-CREF,” Journal of Finance 53: 1335-1362; Michael P. Smith, 1996, “Share-

holder activism by Institutional Investors: Evidence from CalPERS,” Journal of Finance

51: 227-252; Andrew K. Prevost and Ramesh P. Rao, 2000, “Of What Value Are Share-

holder Proposals Sponsored by Public Pension Funds?,” The Journal of Business 73:

177-204.

ships with their investee rms necessary to make credible

governance changes, and (iv) may have less consistent, more

statistics-based investing models.²

It seems plausible that Berkshire would have fewer agency

problems with its investees because of Buett’s reputation as a

trustworthy, long-term buy-and-hold investor, e.g., his invest-

ment in the Washington Post Company dates back to 1973.

Buett’s opinions are clear and he is generally respected for his

knowledge of accounting, governance, and investing matters.

is makes studying Buett, Berkshire Hathaway, and

Berkshire’s “investees” (the portfolio of companies in which

Berkshire holds shares) important for at least ve reasons.

First, Buett is a powerful investor with a well-publicized

long investment horizon. ere are other famous and powerful

investors such as George Soros and Peter Lynch but none of

them provide detailed and transparent commentary on their

investing, accounting, and governance philosophies. Most

other investors, whether powerful or not, tend to be secretive

about their investment strategies.

Second, often described as the “Oracle of Omaha,”

Buett’s views on accounting, governance, and investment

practices are topics that are inherently worthy of study.

ird, Buett argues that powerful investors are one way

to substantially improve corporate governance. If an outspo-

ken investor such as Buett is eective at improving the

2 “Investors should be skeptical of history-based models. Constructed by a nerdy-

sounding priesthood using esoteric terms such as beta, gamma, sigma and the like,

these models tend to look impressive. Too often, though, investors forget to examine the

assumptions behind the symbols. Our advice: Beware of geeks bearing formulas.” (Buf-

fett’s letter to Berkshire Hathaway shareholders, 2/27/09).

by Robert M. Bowen, University of San Diego and the University of Washington; Shivaram Rajgopal, Columbia

Business School, and Mohan Venkatachalam, Duke University*

arren Buffett is the Chairman and CEO of Berkshire Hathaway Inc., one of the

largest investment funds in the United States. He is known to many as the

“World’s Greatest Investor” for his long-term record. A share of Berkshire bought for $19 in

1965 is worth more than $317,000 as of September 4, 2018.

A review of Buett’s commentary on accounting,

governance, and investing practices:

does he “walk the talk”?

W