Search
Close this search box.
Search
Close this search box.

Why Warren Buffett is Suspicious of CEOs who Always “Make the Numbers”

The billionaire investor is concerned that stellar "adjusted" earnings could belie an unhealthy corporate culture.

GettyImages-556744117-compressorYou’d think that consistently hitting or exceeding earnings targets would be an achievement that one of the world’s richest investors would applaud.

Not so for Berkshire Hathaway CEO Warren Buffett, who is very wary about the type of forecasts that companies are actually hitting.

If they’re “adjusted”, he’s not impressed.

Nevertheless, it’s become increasingly common for companies—and the analysts and journalists who cover them—to focus on numbers that differ from bottom line results based on Generally Accepted Accounting Principals (GAAP). The reasoning is that one-off expenses won’t be repeated in future years, so it’s OK for them to be excluded to paint a more accurate comparison of a organization’s continuing performance.

“Too many managements—and the number seems to grow every year—are looking for any means to report, and indeed feature, “adjusted earnings” that are higher than their company’s GAAP earning.

That can be misleading, according to Buffett and Berkshire Hathaway vice-chairman Charlie Munger, who fear that real costs are a little too conveniently excluded from consideration.

“Too many managements—and the number seems to grow every year—are looking for any means to report, and indeed feature, “adjusted earnings” that are higher than their company’s GAAP earnings,” Buffett wrote Saturday in his closely-watched annual letter to shareholders.

Two adjustments that rankle the billionaire most are the omission of “restructuring costs” and “stock-based compensation” from expenses.

And his concerns go much deeper than what such disclosure practices mean for interpreting financial results. They also, he fears, can say something about the corporate culture engendered by CEOs.

“A management that regularly attempts to wave away very real costs by highlighting “adjusted per-share earnings” makes us nervous,” Buffet wrote.” That’s because bad behavior is contagious: CEOs who overtly look for ways to report high numbers tend to foster a culture in which subordinates strive to be “helpful” as well.”

That’s why he and Munger both “cringe” when they hear analysts praise managers who always make the numbers.

“In truth, business is too unpredictable for the numbers always to be met,” Buffett said. “Inevitably, surprises occur. When they do, a CEO whose focus is centered on Wall Street will be tempted to make up the numbers.”

Berkshire Hathaway reported a 15% rise in fourth-quarter profit to $6.29 billion. In his letter, Buffett also took aim at investment managers who charge additional fees for trying to outperform the market.

He estimated that investors had wasted more than $100 billion on Wall Street fees over the past decade. “The bottom line: when trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients,” Buffett said. “Both large and small investors should stick with low-cost index funds.”


MORE LIKE THIS

  • Get the CEO Briefing

    Sign up today to get weekly access to the latest issues affecting CEOs in every industry
  • upcoming events

    Roundtable

    Strategic Planning Workshop

    1:00 - 5:00 pm

    Over 70% of Executives Surveyed Agree: Many Strategic Planning Efforts Lack Systematic Approach Tips for Enhancing Your Strategic Planning Process

    Executives expressed frustration with their current strategic planning process. Issues include:

    1. Lack of systematic approach (70%)
    2. Laundry lists without prioritization (68%)
    3. Decisions based on personalities rather than facts and information (65%)

     

    Steve Rutan and Denise Harrison have put together an afternoon workshop that will provide the tools you need to address these concerns.  They have worked with hundreds of executives to develop a systematic approach that will enable your team to make better decisions during strategic planning.  Steve and Denise will walk you through exercises for prioritizing your lists and steps that will reset and reinvigorate your process.  This will be a hands-on workshop that will enable you to think about your business as you use the tools that are being presented.  If you are ready for a Strategic Planning tune-up, select this workshop in your registration form.  The additional fee of $695 will be added to your total.

    To sign up, select this option in your registration form. Additional fee of $695 will be added to your total.

    New York, NY: ​​​Chief Executive's Corporate Citizenship Awards 2017

    Women in Leadership Seminar and Peer Discussion

    2:00 - 5:00 pm

    Female leaders face the same issues all leaders do, but they often face additional challenges too. In this peer session, we will facilitate a discussion of best practices and how to overcome common barriers to help women leaders be more effective within and outside their organizations. 

    Limited space available.

    To sign up, select this option in your registration form. Additional fee of $495 will be added to your total.

    Golf Outing

    10:30 - 5:00 pm
    General’s Retreat at Hermitage Golf Course
    Sponsored by UBS

    General’s Retreat, built in 1986 with architect Gary Roger Baird, has been voted the “Best Golf Course in Nashville” and is a “must play” when visiting the Nashville, Tennessee area. With the beautiful setting along the Cumberland River, golfers of all capabilities will thoroughly enjoy the golf, scenery and hospitality.

    The golf outing fee includes transportation to and from the hotel, greens/cart fees, use of practice facilities, and boxed lunch. The bus will leave the hotel at 10:30 am for a noon shotgun start and return to the hotel after the cocktail reception following the completion of the round.

    To sign up, select this option in your registration form. Additional fee of $295 will be added to your total.