Buffett Warns Managers: Avoid the Trap of Everyone

Omaha, NE, October 12, 2006--Warren Buffett has warned his top managers at Berkshire Hathaway Inc. against the seduction of "the five most dangerous words in business" -- "everybody else is doing it." In a recent memo, Buffett, chairman and chief executive officer of the insurance and investment giant, told top managers -- referred to as "the All-Stars" -- "a lot of banks and insurance companies have suffered earnings disasters after relying on that rationale." Buffett wrote that people have gotten involved in "ill-conceived activities" because they accepted the "seductive argument" that "a number of well-respected managers were engaging in such practices and therefore it must be OK to do so." "But it couldn't be more wrong," he wrote. "In fact, every time you hear the phrase 'everybody else is doing it' it should raise a huge red flag. Why would somebody offer such a rationale for an act if there were a good reason available?" Buffett said anyone offering "everybody else is doing it" as an argument must have "at least a small doubt about the act if he utilizes this verbal crutch." "Even worse have been the consequences from using that phrase to justify the morality of proposed actions," he warned, pointing to the current scandals over backdating of stock options and "all of the accounting gimmicks to manipulate earnings -- and deceive investors -- that has taken place in recent years." Recently, federal authorities in Connecticut brought a 16-count indictment against former executives of General Reinsurance Corp., a Berkshire (NYSE:BRKa) subsidiary, and American International Group Inc. related to an investigation into finite reinsurance transactions between the two companies (BestWire, Sept. 21, 2006). The indictment charges that the defendants engaged in a fraudulent scheme to make it appear as though AIG (NYSE:AIG) increased its loss reserves by executing two sham reinsurance transactions, of $250 million each, in the fourth quarter of 2000 and the first quarter of 2001. Meanwhile, the U.S. Securities & Exchange Commission and the U.S. Justice Department reportedly are probing more than 100 companies over the timing of their stock-options grants. At issue is whether company executives illegally "backdated" the grants, increasing the value of the options by timing them at low points and thereby increasing executives' payouts, according to reports. UnitedHealth Group Inc.'s stock-option grant practices to top company executives, including its CEO, are the subject of an informal inquiry by the SEC, and federal prosecutors in New York have subpoenaed the health insurer on the matter (BestWire, June 26, 2006). Public pension funds from five states filed lawsuits against current and former board members of the company -- and the Connecticut attorney general got on board. Buffett advised his managers to "start with what is legal, but always go on to what we would feel comfortable about being printed on the front page of our local paper, and never proceed forward simply on the basis of the fact that other people are doing it." He said it's inevitable that someone at Berkshire, which employees more than 200,000 people, would engage in something he "would be unhappy about." But he urged his managers to minimize such activities by "jumping on anything immediately when there is the slightest odor of impropriety." "Berkshire's reputation is in your hands," he wrote. Debbie Bosanek, an assistant to Buffett, said Berkshire's CEO issues such memos to top managers every couple of years. "Berkshire is constantly acquiring new companies," she said, and the memos are Buffett's way of reminding newcomers of Berkshire's way of doing business.

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