By Bill Rigby
NEW YORK, March 8 (Reuters) - Billionaire investor Warren Buffett, who warned of skulduggery in U.S. boardrooms long before accounting scandals brought down companies like Enron Corp. and WorldCom Inc., called on chief executives to clean up their act in his annual letter to shareholders on Saturday.
But Buffett, 72, known as the "Oracle of Omaha" for his canny stock picks and knack of predicting the business future, said new measures designed to check wayward CEOs might not prove worthwhile.
"It's time for CEOs to walk the walk," Buffett wrote in his widely read annual letter to shareholders of his Berkshire Hathaway Inc. (BRKa.N) holding company.
"Too many (CEOs) have in recent years behaved badly at the office, fudging numbers and drawing obscene pay for mediocre business achievements."
But even as U.S. companies face tighter rules on boardroom behavior, with the passage of the Sarbanes-Oxley Act last autumn, Buffett said CEOs would fight meaningful change.
"The acid test for reform will be CEO compensation," he wrote. While bosses would cheerfully agree to meaningless proposals, many would fight "a hard look at their own pay and perks."
Buffett, a longtime campaigner against excessive pay for CEOs, stock option "mega-grants", compliant accountants and weak-willed directors, said new rules would not fix the problems.
"I doubt ... that most of the other new governance rules and recommendations will provide benefits commensurate with the monetary and other costs they impose," he wrote, after welcoming rules that would force outside directors to meet more often without the CEO -- in the hope of breaking up the cozy atmosphere in U.S. boardrooms.
He even called for the reversal of the SEC's move to shorten financial reporting deadlines for companies, saying it was a "mistake" that would lead to worse information for shareholders, not better.
CEOS FALL FROM GRACE
Buffett, written off by many during the technology bubble, when he refused to buy Internet-related shares, has returned to favor after many of his predictions came to pass. On Saturday Berkshire Hathaway reported its highest-ever annual profit, of $4.3 billion for 2002.
He was largely ignored 10 years ago when he predicted a fall from grace for CEOs, after witnessing the political lobbying to keep the cost of stock option grants out of earnings reports, a move that inflated profits and in turn boosted CEOs' pay packets.
"As stock prices went up, the behavioral norms of managers went down," Buffett wrote in his latest shareholder letter, reflecting on the boom of the 1990s. "The job of CEOs is now to regain America's trust. They will not succeed, however, by way of fatuous ads, meaningless policy statements, or structural changes of boards and committees."
Buffett then lashed board directors for failing to stand up to bad managers, blaming a "boardroom atmosphere" that made it hard to challenge CEOs. Buffett, who has served on 19 boards, apart from Berkshire, over the past 40 years, did not exempt himself from criticism. "Too often I was silent when management made proposals that I judged to be counter to the interest of shareholders. In those cases, collegiality trumped independence."
Buffett saved his most stinging rebukes for mutual fund directors, which he accused of "zombie-like" behavior in selecting managers.
"A monkey will type out a Shakespeare play before an 'independent' mutual-fund director will suggest that his fund look at other managers, even if the incumbent manager has persistently delivered substandard performance," he wrote.
NEEDS NEW DIRECTORS
Instead, Buffett called on institutional shareholders to stand up to bad CEOs.
"Twenty, or even fewer, of the largest institutions, acting together, could effectively reform corporate governance at a given company, simply by withholding their votes for directors who were tolerating odious behavior," Buffett wrote. "In my view, this kind of concerted action is the only way that corporate stewardship can be meaningfully improved."
In the meantime, he advised investors to be wary of firms offering adjusted earnings figures, unintelligible footnotes and earnings predictions -- especially if they continually meet them. "Managers that always promise to 'make the numbers' will at some point be tempted to make up the numbers," Buffett wrote.
Buffett added that his own Berkshire Hathaway would start a search for new independent directors, to fall in with proposed rules requiring outside directors to form a majority on companies' boards. Berkshire's seven-person board has only three independent directors. Buffett said he would look for large shareholders with "huge and true" ownership interests in Berkshire Hathaway to be directors.
Original article: http://www.reuters.com/newsArticle.jhtml?type=topNews&storyID=2348386