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CEO Performance Standards

The Concept

In the 1988 Letter, Buffett identified a critical failure in corporate governance: the lack of objective, measurable performance standards for CEOs compared to their subordinates.

The Typist Analogy

Buffett uses a "logical standard" comparison:

  • The Typist: A secretary hired for an 80-WPM job who types 50-WPM is fired almost immediately. The standard is objective and easily measured.
  • The CEO: An inadequate CEO is often carried for years. Their performance shortfalls are waived or "explained away" by a congenial Board of Directors.

Key Issues in Governance

  1. Fuzzy Standards: CEO goals are often subjective (e.g., "strategic repositioning") rather than tied to hard metrics like return on equity or per-share growth.
  2. Painting the Bullseye: Buffett critiques the tendency for managers to "shoot the arrow" of performance and then "paint the bullseye" wherever it lands to claim success.
  3. Lack of Superior: Unlike a sales manager who must answer for a failing sales force, a CEO's "boss" is a Board of Directors that seldom holds itself accountable.
  4. Social Inhibitions: Criticism at the board level is often seen as "the social equivalent of belching," preventing real accountability.

Buffett's Solution

Berkshire's solution is Capital Allocation as the primary metric. Buffett and Munger judge their own performance on the growth of Intrinsic Value per share, not on social standing or size of the capital base.