What are the primary responsibilities of a board of directors, and why does Warren Buffett believe many corporate boards are ineffective?

Primary Responsibilities of the Board of Directors

As the core institution of corporate governance, the Board of Directors primarily represents shareholder interests and oversees and manages the overall operations of the company. Its main responsibilities include:

• Hiring and Overseeing Management: Selecting, evaluating, and dismissing the Chief Executive Officer (CEO) and other senior executives, ensuring management actions align with shareholder interests.
• Determining Compensation and Incentives: Establishing executive compensation packages to ensure they are linked to company performance and avoid excessive pay.
• Strategic Decision-Making and Risk Oversight: Approving company strategy, major investments, mergers and acquisitions, and monitoring potential risks such as financial, legal, and operational risks.
• Ensuring Compliance and Transparency: Overseeing the company's compliance with laws, regulations, and accounting standards, and providing shareholders with accurate information disclosure.
• Protecting Shareholder Rights: Prioritizing the protection of long-term shareholder value when conflicts arise (e.g., misalignment between management and shareholder interests).

These responsibilities aim to ensure the efficient operation of the company and maximize shareholder returns.

Why Buffett Believes Many Corporate Boards Are Ineffective

Warren Buffett has repeatedly criticized in his shareholder letters that many corporate boards fail to fulfill their duties, rendering them ineffective. The main reasons are:

• Lack of Independence: Many directors are friends, acquaintances, or business partners of the CEO, rather than truly independent representatives. They are often reluctant to challenge management to avoid damaging personal relationships or their own interests, turning the board into a "rubber stamp" that passively approves decisions.
• High Pay, Low Effort: Directors receive substantial compensation (sometimes hundreds of thousands of dollars) but invest limited time and effort. Some serve on multiple boards simultaneously, preventing them from gaining a deep understanding of the company's business, often merely "nodding through" decisions after attending a few meetings.
• Flawed Selection Process: Board members are typically nominated and recommended by management, with weak shareholder influence. This makes boards more inclined to protect management interests rather than shareholder rights. Buffett notes that this "club-like" culture causes boards to neglect their oversight duties.
• Absence of Performance Evaluation: Many boards do not evaluate their own performance or rigorously scrutinize management. Even when company performance is poor, boards rarely take action, such as dismissing an ineffective CEO, leading to governance failures.
• Cultural and Motivational Issues: Buffett believes directors often prioritize short-term reputation and social status over long-term shareholder value. This stands in stark contrast to the governance model at Berkshire Hathaway, where Buffett emphasizes that boards should think and act like owners.

Buffett advises that boards should place greater emphasis on independence and accountability to genuinely safeguard shareholder interests; otherwise, they will damage the company's long-term value.