I am committed to the highest level of management ethics.  I would rather see the company fail financially than compromise ethics.  With this in mind, below are four ethics principles that I believe capture the responsibilities management has with its investors.

1.  Treat shareholders as long term business partners; and view management as managing partners.

    • An enterprise must be managed with the perspective that investors (not management) own the assets contained within the company.
    • It is management’s responsibility to ensure all executive compensation and perks are clearly understood and approved by its investors.

2.  Be clear, open and honest in our communications with investors.

    • Whether the news is good, neutral, or bad, management is responsible for making it easy for investors to understand what is happening in the business.
    • Financial performance should be tracked and reported in a clear and unbiased way.
    • Management should understand and clearly articulate the risk profile inherent in the businesses decisions being made.

Warren Buffet writes “Elsewhere, triumphs are trumpeted, but dumb decisions either get no follow-up or are rationalized.”This behavior finds its way into the culture and operations of a company.  High risk business decisions are encouraged because if they pay off, the rewards are high and if they don’t, the ramifications are less than they should be.  Though human nature might resist, management must be candid in its self-assessment, even when it comes up short.”

As part of effective communication, management must strive to measuring and reporting financial performance in a clear and unbiased way.  As part of this, management should seek to understand and clearly articulate the risk profile inherent in the businesses decisions being made.

3.     Understand the meaning of “Intrinsic Value” and make maximizing Intrinsic Value the basis for business decisions.

Warren Buffett refers to intrinsic value as an all important concept.  He defines it as the discounted value of the cash that can be taken out of a business during its remaining life.  Maximizing intrinsic value needs the guide for all business decision making.   At times, this may cause conflict with the notion that the CEO’s job is “maximize stock price”.  Inappropriate behavior—such as hyping exciting developments or masking unfavorable results—could result from defining the goal as “Maximize Stock Price” instead of “Maximize Intrinsic Value”.

Buffett says: “If Intrinsic Value increases, the stock price will eventually follow.”

4.   Investors should be informed of the company’s true Intrinsic Value, not more and not less.

Buffett points out that Intrinsic Value is easier to define than to accurately calculate.  Management’s goal should be to help investors gain an accurate understanding (to the best of management’s ability) of the Intrinsic Value.  This principle could be a source of  conflict with the common-held belief that a CEO’s goal is to “maximize stock price”.  If a stock price reflects an enterprise value that differs from Intrinsic Value, the result is one class of shareholder will benefit at the expense of another class.  For example, if the valuation implied by the stock price exceeds the Intrinsic Value, new shareholders will be overpaying exiting shareholders.

The ethics goal is to be fair to all shareholders.  To accomplish this, management must strive to ensure their investors’ perceived value of the firm (whether the entity is a public or private company) is in line with management’s estimation of Intrinsic Value.



3 Responses to “Management Ethics of Dan Caruso”


  • Jim says:

    Great article, but don’t new shareholders always pay exiting shareholders to some extent?

  • Parkite says:

    Warren Buffet writes “Elsewhere, triumphs are trumpeted, but dumb decisions either get no follow-up or are rationalized.”

    So do you think Sokol deserves a $1M annual pension in light of his insider trading on Lubrizol prior to acquisition by Berkshire? Kind of a black eye for Buffet when the heir apparent (from an operations standpoint) does this? Too bad Buffet didn’t take the oppty to make Sokol an example and not pay him and risk a lawsuit. Walk the walk, Warren. Must be too busy with “Buffet Tax” details to pursue this.

    Link to story:
    http://www.bloomberg.com/news/2012-02-28/sokol-gets-1-million-a-year-retirement-pay-berkshire-s-midamerican-says.html

  • eatyourown says:

    “It is management’s responsibility to ensure all executive compensation and perks are clearly understood and approved by its investors”

    …if this is true, why does the VP of your NOC Operations continually run around board approval by not submitting managers and their salaries for review and instead sneaking them through by not submitting their official promotions? There are two well known cases of this happening.

Leave a Reply