Warren Buffett wants to end Wall Street's broken earnings game
Billionaire investor Warren Buffett told CNBC on Thursday that companies should stop issuing earnings guidance because it can lead to "a lot of malpractice" and "bad results."
The chairman and CEO of Berkshire Hathaway appeared on "Squawk Box" to run down the ideas for reforming corporate governance that he and other powerful business and investment leaders discussed in a series of quiet meetings over the past year or so.
"[Earnings] guidance can lead to a lot of malpractice," Buffett said. "I've seen guidance produce some bad results."
If earnings are going to slightly miss the expectations informed by company guidance, "there's a lot of attempts to find a couple extra pennies someplace," he said. "There are ways to move earnings toward the end of a quarter, and sometimes even after the end of a quarter."
Buffett said this earnings recommendation was aimed "to give encouragement to companies that really felt uneasy about giving guidance to perhaps have a little more backbone about it."
Emailing "Squawk Box" in April, JPMorgan Chase (JPM) Chairman and CEO Jamie Dimon waded into the corporate earnings discussion, saying quarterly results should not be compared to analyst estimates.
"Report two real numbers; this year versus last year," he wrote at the time, arguing such a change would hold companies accountable on how their businesses have grown or shrunk compared to the same quarter a year earlier.
Buffett told CNBC on Thursday it was Dimon who initiated the effort to talk about best practices for corporate governance. ( Click here to read the open letter that the CEOs signed off on.)
"Jamie gave me [and others] a call ... probably a little more than a year ago," he continued, "and suggested we get together and see if we could come together on some general principles for corporate governance that might help show a pathway to the future."
The general rules by which companies are operated and controlled have evolved over the years, Buffett said, referring to the emergence of competing constituencies, especially with activist investors stepping up their efforts to influence the proceedings.
The process was designed around "creating a dialogue," Buffett said. "This is not something we're going to be passing around and hoping we get hundreds of signatures."
"We welcome other views on it," he continued. "These did not come down on a tablet from the mountain."
Addressing the cutthroat nature of being a publicly traded company, Buffett said he originally wanted Berkshire Hathaway (BRK-A) to be private.
"I've had an interesting transformation on that. I originally would have preferred that Berkshire Hathaway be a private company. And over the years, my view on that has changed 180 degrees," he said. "I enjoy being a public company now.
"I like the fact that people put their trust in us, and we treat them like partners and they feel partners," he added.
Buffett said the "primary allegiance" of corporate boards should to the investors. "I believe that the board of directors is there to represent shareholders, the owners."
On the issue of dual-class stocks, the group generally disapproved, saying there should be "sunset provisions" in place.
Buffett acknowledged he has a dual class at Berkshire in the form of Class A shares and Class B shares.
"On balance, it's better to have one class of stock," said Buffett, but he added that the dual class works at Berkshire.
"As I give away my own shares, and I've given away about 40 percent [to charity] so far and I'll give away every share I have, I always convert the ... 'A' stock into the 'B' stock. So the 'A' stock will have less proportionately as it goes along," he said.
"We also have a provision that in the event of any kind of a corporate transaction, the 'A' stock cannot be treated differently than the 'B' stock. I think that's important and we put that in our paper," he added.
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