What makes a good director?

This analysis is provided by Eden Bradfeld at BlackBull Research—sign up for their Substack to receive the latest market insights straight to your inbox.

I’ve been spending a lot of time thinking about good governance and good boards. There is a lot that can be said about bad boards, but a lot less is said about what makes a good director. So what makes a good director? I'll start with a quote from Grandpa Buffett’s recent letter (published yesterday):

During the 2019-23 period, I have used the words “mistake” or “error” 16 times in my letters to you. Many other huge companies have never used either word over that span. Amazon, I should acknowledge, made some brutally candid observations in its 2021 letter. Elsewhere, it has generally been happy talk and pictures.

I have also been a director of large public companies at which “mistake” or “wrong” were forbidden words at board meetings or analyst calls. That taboo, implying managerial perfection, always made me nervous (though, at times, there could be legal issues that make limited discussion advisable. We live in a very litigious society.)

Also worth his thoughts on CEOs and schooling (I have never really understood the point of an MBA:

One further point in our CEO selections: I never look at where a candidate has gone to school. Never!

Of course, there are great managers who attended the most famous schools. But there are plenty such as Pete who may have benefitted by attending a less prestigious institution or even by not bothering to finish school. Look at my friend, Bill Gates, who decided that it was far more important to get underway in an exploding industry that would change the world than it was to stick around for a parchment that he could hang on the wall. (Read his new book, Source Code.)

Not long ago, I met – by phone – Jessica Toonkel, whose step-grandfather, Ben Rosner, long ago ran a business for Charlie and me. Ben was a retailing genius and, in preparing for this report, I checked with Jessica to confirm Ben’s schooling, which I remembered as limited. Jessica’s reply: “Ben never went past 6th grade.”

Anyway — some thoughts on what makes a good director, from observation:

• Accountants and lawyers rarely make a good director. There are exceptions¹, but often I think a “professional” is conflated with a “good businessperson”. Think of the “professionals” who have sat on the board of Fletcher Building and added dubious value.
  
• Founders, and owner-operators (or former owner-operators) often make a good director because they innately understand what makes a business tick. To quote the Druck’s former boss — “it’s all cash in, cash out, son”
  
• Trust is crucial. To paraphrase St. Charlie Munger — “a web of trust is important…and be careful whom you trust”
  
• The tick boxes that many boards do these days are rarely useful. There is an inordinate amount of focus on tick boxes, and not enough on the actual business activities.
  
• Directors who see their duty to the shareholders and company tend to be best. This seems obvious, but is not always put into practice.
  
• Industry experience, funnily enough, is also important. You need to understand what you sell, who your customer is, and how you make a buck.
  
• A strong CEO is also important — think about Buffett, Gates, or Jobs. A board should provide guidance, but the CEO should be the guiding light.
  
• If you have the fortune of having a great CEO, you ought to let them do their thing and not micro-manage them. Micro-management has never worked out, and is the domain of mediocre mid-level executives who eat depressing food.
  
• Equally, a strong board is important — while you want your CEO to be an all-star, you don’t want those little dogs that live in handbags as board members — that defeats the point.
  
• Sadly, not many CEOs are too amenable to pit bulls.
  
• High compensation is not important. Ideally your board members should be independently wealthy. If a large part of their income is derived from their board comp, you will find they magically seem to have roles on five different boards — all in different industries.
  
• To wit, from Buffett (quoting him a lot today, I know!): “Over the years, board “independence” has become a new area of emphasis. One key point relating to this topic, though, is almost invariably overlooked: Director compensation has now soared to a level that inevitably makes pay a subconscious factor affecting the behaviour of many non-wealthy members. Think, for a moment, of the director earning $250,000–300,000 for board meetings consuming a pleasant couple of days six or so times a year. Frequently, the possession of one such directorship bestows on its holder three to four times the annual median income of U.S. households.”
  
• To that effect, just because a board member is on another board is not an endorsement.
  
• Buying stock in a company with your own money, if you are a director, is a good thing. Being “truly independent” and having no stock is a warning sign — the director’s interests are aligned with his or her director’s fees, rather than the trajectory of the company.
  

¹ If you are one of my lawyer or accountant friends — you know who you are — you are the exception.