I think we all can learn something from Warren Buffett regarding directors and audit committees

We will select directors who have huge and true ownership interests (that is, stock that they or their family have purchased, not been given by Berkshire or received via options), expecting those interests to influence their actions to a degree that dwarfs other considerations such as prestige and board fees.

It baffles me how the many directors who look to these dollars for perhaps 20% or more of their annual income can be considered independent. If regulators believe that “significant” money taints independence (and it certainly can), they have overlooked a massive class of possible offenders.

At Berkshire, wanting our fees to be meaningless to our directors, we pay them only a pittance. Additionally, not wanting to insulate our directors from any corporate disaster we might have, we don’t provide them with officers’ and directors’ liability insurance (an unorthodoxy that, not so incidentally, has saved our shareholders many millions of dollars over the years). Basically, we want the behavior of our directors to be driven by the effect their decisions will have on their family’s net worth, not by their compensation.

To find new directors, we will look through our shareholders list for people who directly, or in their family, have had large Berkshire holdings-in the millions of dollars-for a long time. Individuals making that cut should automatically meet two of our tests, namely that they be interested in Berkshire and shareholder-oriented. In our third test, we will look for business savvy, a competence that is far from commonplace.

Audit Committee

Audit committes can’t audit. Only a company’s outside auditor can determine whether the earnings that a management purports to have made are suspect. Reforms that ignore this reality and that instead focus on the structure and charter of the audit committee will accomplish little. As we have discussed, far too many managers have fudged their company’s numbers in recent years using both accounting and operation techniques that are typically legal but that nevertheless materially mislead investors. Too often, however, they remain silent. The key job of the audit committee is simply to get the auditors to divulge what they know.

To do this job, the committee must make sure that the auditors worry more about misleading its members than about offending management. In recent years auditors have not felt that way, they have instead generally viewed the CEO, rather than the shareholders or directors, as their client.

Buffet has three suggestions for investors:

1. Beware of companies displaying weak accounting

2. Unintelligible footnotes usually indicate untrustworthy management

3. Be suspicious of companies that trumpet earnings porjections and growth expectations

http://www.berkshirehathaway.com/letters/2002pdf.pdf