Berkshire Meeting: Buffett on Wells Fargo's 'Huge, Huge, Huge Error'

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The first question is via Carol Loomis, and it's one we knew was coming about Wells Fargo & Co.'s sales scandal. The questioner wants to know whether Mr. Buffett worries that Berkshire's structure is such that a similar thing could happen there.

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Mr. Buffett's answer refers in part to Solomon Brothers, where Mr. Buffett had to come in and serve as chairman for a time to clean up after a scandal. Management there, he says, didn't act when they initially found out about misbehavior by an employee, and that was a big part of the problem.

At Berkshire, Mr. Buffett says that there's a hotline for employees to call to report misbehavior. It gets about 4,000 calls per year. While many calls are frivolous, he says ("the guy next to me has bad breath"), it has repeatedly caught behavior that Mr. Buffett stepped in to stop.

He doesn't know any better system to catch bad behavior, he said, than a hotline and anonymous letters that Berkshire employees can send to him. Three or four such letters "have resulted in major changes" at a subsidiary over the past several years, he says. It's a good system, but "I don't think it's perfect."

"If you establish the right sort of culture," he says, "you will get better resultsÂ… than if you have a 1,000-page guidebook."

But since Berkshire has more than 350,000 employees, "people are doing something wrong as we talk here today."

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As for Wells Fargo, "It was a huge, huge, huge error if they were getting some communications and they ignored them."

In fact, The Wall Street Journal has reported that new Wells Fargo Chief Executive Timothy Sloan told some employees in November that the bank found "some instances" where reports by employees of bad behavior to its ethics line weren't handled appropriately. And there have been allegations that some employees faced retaliation for reporting issues that later came to light as part of its sales-practices scandal.

"If we find complaints were mishandled, then we will take action to make it right," Mr. Sloan said, according to the Journal.

Mr. Buffett also said that Wells Fargo's incentive structure was a problem. It "dwarfs" whatever other issues the bank had. "You can't incentivize bad behavior," he says.

This is something that Mr. Buffett and Mr. Munger have said repeatedly in a variety of contexts. This time, Mr. Buffett says Wells Fargo made a mistake with its pay practices when it incentivized cross-selling, or the selling multiple products to customers. That encouraged people to add on fake accounts, he says.

Click here to see the full live coverage of Warren Buffett at Berkshire Hathaway's annual meeting:

http://www.wsj.com/livecoverage/berkshire-hathaway-2017-annual-meeting-analysis

Write to Erik Holm at erik.holm@wsj.com

(END) Dow Jones Newswires

May 06, 2017 11:17 ET (15:17 GMT)