Some Berkshire Hathaway (BRK-A, BRK-B) shareholders were probably surprised to see that Wells Fargo (WFC) was missing from Warren Buffett’s newest shareholder letter.
Last fall, Wells was fined $185 million after regulators found employees at the retail bank opened as many as 2 million fraudulent accounts opened without customers’ permission to meet sales targets. The bank fired more than 5,000 employees tied to the scandal.
Berskhire Hathaway has been invested in Wells Fargo since 2001. It’s currently Berkshire’s second largest position. Berkshire also remains the largest shareholder of Wells Fargo, with more than 479.7 million shares, a position valued at nearly $28 billion. Berkshire didn’t sell any Wells Fargo stock following the scandal through the end of 2016, regulatory filings show.
In the 2016 letter, Buffett makes no explicit reference to Wells Fargo or its now-former chief executive, John Stumpf. Tim Sloan, then-COO, assumed the helm as CEO in the wake of the scandal.
Buffett does, however, discuss bad behavior from CEOs in a much broader sense in the letter (emphasis added): “Charlie [Munger] and I want managements, in their commentary, to describe unusual items — good and bad — that affect the GAAP numbers. After all, the reason we look at these numbers of the past is to make estimates of the future. But a management that regularly attempts to wave away very real costs by highlighting ‘adjusted per-share earnings’ makes us nervous. 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. Goals like that can lead, for example, to insurers underestimating their loss reserves, a practice that has destroyed many industry participants.”
Buffett went on to criticize Wall Street analysts who praise CEOs for hitting numbers.
“Charlie and I cringe when we hear analysts talk admiringly about managements who always ‘make the numbers. In truth, business is too unpredictable for the numbers always to be met. Inevitably, surprises occur. When they do, a CEO whose focus is centered on Wall Street will be tempted to make up the numbers.”
Earlier this month, Berkshire Hathaway’s vice chairman and Buffett right-hand man, Charlie Munger, spoke about the Wells Fargo incident.
“Of course, Wells Fargo had a glitch,” Munger said at the 2017 Daily Journal Meeting (DJCO) in Los Angeles. “Truth of the matter is they made a business judgment that was wrong. They got so caught up with cross-selling and so forth that they got the incentive system so aggressive, I guess some people reacted badly and did some things they shouldn’t. And then they used some misjudgment … Wells Fargo, they made a mistake. And it was an easy mistake to make.”
But the incentive system wasn’t the real mistake, according to Munger.
“I think the mistake there was when the bad news came they didn’t recognize it rightly. They made a mistake. What happens in a tough system like capitalism, you make a mistake like that and you’re gone,” Munger said. “They didn’t react enough to the bad news fast enough. Of course, that’s a very dangerous thing to do. I don’t think it impacts the future of Wells Fargo. As a matter of fact, they’ll be better for it. The nice thing about doing something dumb is you probably won’t do it again.”
Yahoo Finance will host the exclusive live stream of Berkshire Hathaway’s shareholders’ meeting on May 6, 2017.
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Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.
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