February 26, 2020 Bruce Goldfarb Quoted in The Deal Pipeline

Advisers Push Back on Buffett’s M&A Ideas

The Oracle of Omaha’s proposal urging corporations to hire two expert acquisition advisers, one to deliver the pros of a deal and another to offer its negatives, is meeting resistance.

By Ronald Orol

Updated on February 24, 2020

Warren Buffett believes that independent directors should do a better job of “checking the impulse” of CEOs who want to make acquisitions.

“I have yet to see a CEO who craves an acquisition bring in an informed and articulate critic to argue against it,” the Oracle of Omaha said in his annual letter to Berkshire Hathaway Inc. (BRK.A) shareholders on Saturday, Feb. 22. “And yes, include me among the guilty.”

The billionaire investor offered up an unusual strategy to achieve this goal, one that has some proxy solicitors and bankers scratching their heads. Activist investors, meanwhile, are expected to support at least one of his ideas.

Buffett argued that corporate chiefs rarely bring in outside advisers who provide dissenting opinions, so deals that CEOs want usually happen. “When seeking directors, CEOs don’t look for pit bulls,” Buffett writes. “It’s the cocker spaniel that gets taken home.”

Buffett argued that “too many directors” covet the pay that comes with serving on a board, so they will “play nice” with CEOs to keep their jobs and get a good reference for more directorships.

Expect activists to cheer Buffett’s suggestion that directors with stakes in the companies they serve, paid with their own money, are better incentivized to give good advice. For years, insurgent managers have been pushing for director equity stakes — and they frequently tout their own large equity stakes at companies.

One idea, however, may be difficult — if not impossible — to implement. Buffett said companies could “hire two ‘expert’ acquisition advisors, one pro and one con,” to deliver their views on a proposed acquisition or other deal, “with the winning adviser to receive, say, ten times a token sum paid to the loser.”

Bruce Goldfarb, founder of proxy solicitor Okapi Partners LLC, said that to predetermine what advisers should say before they evaluate the deal could be problematic and may not result in the best advice.

“With all respect, Mr. Buffett should test run this concept on his next acquisition and serve it up as a case study!” Goldfarb said.

Thomas Ball, a proxy solicitor and founder of Vanderbilt Consulting, said banker advisers would have a difficult time providing advice to a company if they were instructed specifically to only study either negative or positive attributes of the transaction — but not both.

“If you hire two firms, one paid to do the pros and another to do the cons of a deals, that requirement would shade their advice,” Ball said. “It makes sense to hire a bank to determine whether the deal makes sense and offer up both the pros and cons of moving ahead.”

Ball argued companies should do a better job of bringing in truly independent directors that will oversee CEOs effectively.  

“If the CEO is picking directors, that is a problem,” Ball said. “There should be a robust process in place to find directors, and the process should be led by independent directors. If the directors do whatever the CEO says, that is a sign of bad governance.”

Ball also challenged the notion that large pay sums could cloud a director’s judgment. He suggested that while a director may like their pay, they also are focused on reputational risk associated with accepting a bad deal for the company. 

“Directors of public companies are more focused on reputational risk of a transaction rather than monetary risk of losing their job because the CEO pushes them out for rejecting deal.”

He agreed with Buffett’s assertion, though, that directors should hold skin in the game, through equity stakes they purchased with their own funds. 

“Worse is a director that sells stock that he or she received through options. That’s a red flag,” he said. “If you have a stake in the company, I think you would pay more attention to what the company wants to do. Having skin in the game just like an activist fund would is an incentive.”

Goldfarb said Buffett’s concept is a nod to activist investors who will fight their way onto boards where they can serve as a pushback against the CEO and emphasize issues designed to improve shareholder value. Installing more “pit bulls,” as Buffett suggested, might be more difficult.

“Buffett’s proposals are not unreasonable, but of course they rely on CEOs and other board members agreeing to have more ‘pit bulls’ in the boardroom,” he said. “It would be interesting to see how the Berkshire board deliberates, especially these days as they come under pressure for underperforming the broader market and face calls to buy back more stock or issue dividends.”