How Berkshire Hathaway selects a new director

Berkshire Hathaway’s four long-standing criteria in selecting a new board director: owner-oriented, business-savvy, interested and truly independent.

Chairman Warren Buffett said: “I say “truly” because many
directors who are now deemed independent by various authorities and observers are far from that, relying
heavily as they do on directors’ fees to maintain their standard of living. These payments, which come in
many forms, often range between $150,000 and $250,000 annually, compensation that may approach or
even exceed all other income of the “independent” director. And – surprise, surprise – director
compensation has soared in recent years, pushed up by recommendations from corporate America’s
favorite consultant, Ratchet, Ratchet and Bingo. (The name may be phony, but the action it conveys is
not.).

“Charlie and I believe our four criteria are essential if directors are to do their job – which, by law,
is to faithfully represent owners. Yet these criteria are usually ignored. Instead, consultants and CEOs
seeking board candidates will often say, “We’re looking for a woman,” or “a Hispanic,” or “someone from
abroad,” or what have you. It sometimes sounds as if the mission is to stock Noah’s ark. Over the years
I’ve been queried many times about potential directors and have yet to hear anyone ask, “Does he think like
an intelligent owner?”

“The questions I instead get would sound ridiculous to someone seeking candidates for, say, a
football team, or an arbitration panel or a military command. In those cases, the selectors would look for
people who had the specific talents and attitudes that were required for a specialized job. At Berkshire, we
are in the specialized activity of running a business well, and therefore we seek business judgment.
“That’s exactly what we’ve found in Susan Decker, CFO of Yahoo!, who will join our board at the
annual meeting. We are lucky to have her: She scores very high on our four criteria and additionally, at 44,
is young – an attribute, as you may have noticed, that your Chairman has long lacked. We will seek more
young directors in the future, but never by slighting the four qualities that we insist upon.”

Source: Chairman Warren Buffett’s FY2006 letter to Berkshire Hathaway shareholders