Why did Munger criticize the traditional board of directors system, and did Berkshire Hathaway do things differently?

Why Does Munger Criticize Traditional Board Systems?

Hey there! As someone who’s long been passionate about value investing and corporate governance, Charlie Munger is a figure I deeply admire. His work with Warren Buffett at Berkshire Hathaway showcases an incredibly pragmatic approach. Munger’s criticism of traditional board systems, in my view, centers on its excessive "formalism." Simply put, many corporate boards look impressive on paper but lack real substance.

• Lack of Independence, More Like Advisors: In traditional boards, directors are often friends of executives, retired CEOs, or celebrities. They receive hefty pay (sometimes hundreds of thousands annually) yet merely attend meetings and rubber-stamp management decisions. Munger likened them to "pet dogs" who won’t challenge a CEO’s mistakes for fear of losing their positions.

• Absence of Accountability: Munger believes boards should act as "guardians" overseeing the company. In reality, they prioritize short-term gains (e.g., stock options) over long-term value. Consequently, when problems arise, boards often deflect blame with claims like "I wasn’t aware."

Munger famously stated: "Most boards are useless—they’re just rubber stamps for management." He argues this system turns governance into a "performance" rather than a genuine safeguard for shareholders.

Has Berkshire Hathaway Adapted?

Absolutely! Berkshire serves as Munger and Buffett’s "testing ground" for their principles. They didn’t abolish the board but overhauled it to prioritize practicality and trust. Unlike bureaucratic giants, Berkshire’s board is small, focused, and composed of "people they personally trust."

• Selection Criteria: Instead of recruiting "external experts," Berkshire’s directors are largely long-term shareholders, close associates, or family members (e.g., Buffett’s son Howard). They receive minimal compensation (director fees are low, just a few thousand dollars) but hold substantial company stock, aligning their interests with shareholders. Munger notes this ensures they think like "owners," not "employees."

• Flexible Operations: Board meetings are informal, bypassing red tape. While Buffett and Munger lead decisions, they welcome candid input. Berkshire emphasizes decentralization, granting subsidiaries significant autonomy without micromanagement—avoiding bureaucratic inertia.

From my perspective, this adaptation makes Berkshire a model for value investing. The company has avoided major scandals for decades while delivering exceptional shareholder returns. Munger’s critique isn’t theoretical; Berkshire proves that good governance relies on trust and aligned incentives, not rigid rules. If you’re curious, check out Munger’s book Poor Charlie’s Almanack for deeper insights!