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Financial Times - What Buffett has known since 1979

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Sir, From Steve Johnson’s Big Picture article “Debate starts on the way bosses’ pay is calculated” (FTfm, April 16), it appears that a number of investors and industry associations such as the Association of British Insurers have recognised the fact that earnings per share growth, total shareholder return and even return on equity are flawed as measures of managerial performance on which remuneration should be based, and have alighted upon return on capital employed.

It is hard for me to see why this should be regarded as a revelation given this statement in Berkshire Hathaway’s chairman’s letter for 1979: “The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry etc) and not the achievement of consistent gains in earnings per share.”

But then why should we listen to Warren Buffett now compared with these UK institutional investors? After all, it has only taken 33 years for even some of them to wise up.

Click here to view the Letter to the Editor on

Terry Smith 

Financial Times