Exploring Corporate Governance Around the World

By Allison Garrett, Senior Vice President for Academic Affairs at Oklahoma Christian University

Wednesday, December 15, 2010

Keeping Your Risk: Wells Fargo Makes the News

Yesterday, Wells Fargo was in the news for a letter written by its Executive VP to regulators. According to John Gibbons, EVP for Wells Fargo, "Rather than being something rare or unusual, it should be common in the mortgage industry to align interests of lenders, borrowers and investor." Huzzah, Wells Fargo!

It may not be a coincidence that major Wells Fargo shareholder Warren Buffett ("Banking is a very good business unless you do dumb things.") has a similar opinion about outsourcing risk through the use of D&O policies and has held that opinion for many years.

His Berkshire Hathaway letters to shareholders are always a good read. Here's an excerpt from last year's letter:

The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style. It is the behavior of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price – one not reimbursable by the companies they’ve damaged nor by insurance. CEOs and, in many cases, directors have long benefitted from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well.

Buffett has believed for many years that the purchase of D&O insurance is another form of offloading risk that should be borne by a company's officers and directors. If you know that if you make a disastrous decision there will be insurance to pay your liabilities, you might not be as prudent as necessary. Remember, the business judgment rule provides a defense, provided that you act in a manner that a reasonbly prudent person would in the conduct of his or her own business.

It's possible that Buffett's views on offloading risk have filtered down to Wells Fargo, but perhaps Wells Fargo was just a good match for his investing philosophy. After all, Buffett looks very closely at management in making his investment decisions. It looks like the senior folks at Wells Fargo have the same prudent views as Buffett.

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