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Buffett: The 'biggest danger' a company faces is picking the wrong CEO

Warren Buffett, the CEO of Berkshire Hathaway (BRK-A, BRK-B), says the most significant risk factor a company faces is selecting the wrong CEO.

The 90-year-old investing legend said that he's "looked at a lot of businesses, and that's what's caused the number one problem," and it's not listed in securities filings.

"The biggest danger, they have that section in the prospectus called…[certain risk factors]. The number one risk factor, you never see it, the number one risk factor is that this business gets the wrong management, and you get a guy or a woman in charge of it that are personable, the directors like them, they don't know what they're doing, but they know how to put on an appearance. That's the single biggest danger," Buffett said during Berkshire Hathaway's annual meeting of shareholders on Saturday.

Later in the meeting, Buffett said the main thing for Berkshire's board is to "preserve the culture" and if they "get the wrong person as the CEO, you can do something about it." 

"That's the biggest risk a board has, is if you pick the wrong CEO and I've been on 20 boards, and this happened more than once. Sometimes it's a terrible problem to get rid of them. Years go by and if a dissident comes in, it's one thing, but if you just sit there and you collect your $300,000, $400,000 a year, and the chief executive keeps proposing you get an increase from time to time — it's worse yet if he's a nice person doing his best."

CEO mythology

Buffett also said he might write in a future annual shareholder letter about the topic of myths perpetuated by CEOs.

"[One] of the subjects I might write about in one of the future annual reports is the problems caused by the myths that people have about their own organization. And I've seen that so many times in various forms," Buffett said.

According to Buffett, this mythology problem has "to some extent become accentuated in the last 20 or 30 years, because the CEO often works with the investor relations and they say, 'Well, we have to have constant contact with the analyst community.' And of course, so they go on every couple of months, and they repeat certain things about their company, and it becomes part of, sort of the catechism. And nobody's going to go on two months after the CEO has said one thing and say, 'Well, actually, that really isn't the way.' They're not going to contradict themselves or change course."

Without mentioning companies by name, Buffett said there's "a lot of mythology that gets handed down from one CEO to the next."

"Can the succeeding CEO say the guy that picked him was on the wrong course or he's been telling you something that isn't really quite true? He can't do it. And then he starts repeating it and it leads to enormous errors, but it's hard to tell the story without giving examples and I don't like to give examples," Buffett added.

Buffett's long-time business partner, Berkshire Hathaway's vice chairman Charlie Munger weighed in: "[What's] really interesting is the way you prattle out all the time. You're pounding back in, even if it's wrong."

Julia La Roche is a correspondent for Yahoo Finance. Follow her on Twitter.

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