Corporate governance has long been a topic of interest to financial researchers in academia. Law schools, too, have spent a lot of time on the issue. The issue of corporate governance arises from the separation of ownership and control at large publicly traded companies. After all, governance is largely irrelevant at closely held companies that are managed by the owners. If the CEO owns all the stock and shirks his responsibilities, he hurts only himself. But when there are many shareholders with only a few actually working at the company, governance becomes a big deal.
With Berkshire Hathaway's shareholders' meeting coming up next weekend, there has been much talk about governance. Warren Buffett is famous for having a hands-off approach to management. He says he buys good companies with good managers and then stays out of the way. He does not want to get involved in the operations.
However, David Sokol's recent resignation from Berkshire Hathaway has a lot of observers wondering if Buffett should not be more hands on. They are also wondering if Berkshire's board of directors is paying sufficient attention to governance.
I find this sudden attention to corporate governance at Berkshire long overdue. In fact, I devoted an entire chapter to the topic in my 2008 book, Even Buffett Isn't Perfect. Yet when the book came out, some critics wondered why anyone would worry about governance at Berkshire. With Sokol's sudden resignation and with the SEC investigating his stock trades, I suspect the critics have finally figured out the answer to that question.