Investor guru Warren Buffett lambastes mutual funds and their directors in Berkshire Hathaway’s 2003 annual report, which was released Saturday.

In the report, Buffet, Berkshire chairman, scolds fund companies that “trampled on the interests of fund shareholders in an appalling manner”, in an effort to boost their profits.

Buffett lays much of the blame at the feet of fund directors, noting that none of the overseers of the “looted funds” have fired the management company. “Can you imagine directors who had been personally defrauded taking such a boys-will-be-boys attitude?”

The only firm that is seeking new managers is up for sale. “This is a travesty,” Buffett says. “Why in the world don’t the directors of those funds simply select whomever they think is best among the bidding organizations and sign up with that party directly? … Any truly independent director should insist on this approach to obtaining a new manager”.

“Let me make a small suggestion to ‘independent’ mutual fund directors. Why not simply affirm in each annual report that: We have looked at other management companies and believe the one we have retained for the upcoming year is among the better operations in the field; and, we have negotiated a fee with our managers comparable to what other clients with equivalent funds would negotiate,” he says.

“It does not seem unreasonable for shareholders to expect fund directors — who are often receiving fees that exceed $100,000 annually – to declare themselves on these points. Certainly these directors would satisfy themselves on both matters were they handing over a large chunk of their own money to the manager,” he writes. “If directors are unwilling to make these two declarations, shareholders should heed the maxim, ‘If you don’t know whose side someone is on, he’s probably not on yours’.”

Buffett isn’t entirely bearish on the fund industry. He says, “A great many funds have been run well and conscientiously despite the opportunities for malfeasance that exist. The shareholders of these funds have benefited, and their managers have earned their pay. Indeed, if I were a director of certain funds, including some that charge above-average fees, I would enthusiastically make the two declarations I have suggested. Additionally, those index funds that are very low-cost (such as Vanguard’s) are investor-friendly by definition and are the best selection for most of those who wish to own equities.”

“I am on my soapbox now only because the blatant wrongdoing that has occurred has betrayed the trust of so many millions of shareholders. Hundreds of industry insiders had to know what was going on, yet none publicly said a word. It took Eliot Spitzer, and the whistleblowers who aided him, to initiate a housecleaning,” Buffett notes. “We urge fund directors to continue the job. Like directors throughout Corporate America, these fiduciaries must now decide whether their job is to work for owners or for managers.”