2014 Berkshire Hathaway Annual Shareholder Meeting The Berkshire Hathaway annual meeting is an opportunity for shareholders and analysts to pose questions to Warren Buffett and Charlie Munger in a five-hour session covering BY R. HUTCHINGS VERNON, CFA Co-Portfolio Manager, over 60 questions. Flexible Equity Strategy MAY 3, 2014 MEETING arren Buffett and Charlie for the company and Buffett will be 2 COMPENSATION PRACTICES AND BOARD Munger are still going understanding, but lose reputation and BEHAVIOR strong at 83 and 90 years he will be ruthless. H. J. HEINZ AND 3G CAPITAL; BOOK young. They tackle dif- These notes are highlights rather RECOMMENDATION W BERKSHIRE’S BENCHMARK OF PERFORMANCE ficult questions and communicate in a than a transcript. Related subjects are clear manner that leaves little doubt as to grouped together. My thoughts and 3 INTRINSIC VALUE their insight and accumulated wisdom. comments are within brackets to dis- INTRINSIC VALUE OF BERKSHIRE, SHARE Attendance has grown to an esti- tinguish them from what I heard at the REPURCHASE AND CAPITAL ALLOCATION mated 38,000 from several hundred KEEPING TRUST WITH MANAGERS; OPERATING ON DESERVED TRUST since I started attending these meetings OPPORTUNITY COST IS THE COST OF CAPITAL 29 years ago. Buffett and Munger are Buffett & Munger 4 BERKSHIRE STOCK VS. AN S&P INDEX FUND great thinkers and entertaining teachers. are still going FOR BUFFETT’S WIFE They celebrate good business and invest- SUCCESSION QUESTIONS; HAVING A PARTNER ment practices, the potential for human strong at 83 and CAPITAL ALLOCATION AND CASH achievement, high ethics and decency to SEE’S CANDIES one’s fellow man. Studying Buffett and 90 years young. Munger, you get a course in business, BANK OF AMERICA investing and decision-making, covering ACQUISITIONS material learned from eight decades of meeting, though they may reflect what 5 CLIMATE CHANGE experience. has been said at prior meetings. TED AND TODD The meeting ingrains the culture of Since Buffett took control of Berkshire FED POLICY Berkshire with shareholders and employ- Hathaway in 1965, he has built it from CONGLOMERATE MODEL AND BERKSHIRE ees. An entertaining movie is shown a small, competitively challenged tex- OIL SANDS each year that celebrates Berkshire’s tile business to a stock with a market MISTAKES AND CHANGE businesses, managers and employees. A capitalization of over $300 billion. 6 GEICO recurring part of the movie is Buffett’s Berkshire ranks as the fifth largest com- CIRCLE OF COMPETENCE testimony to Congress during the pany in the U.S. by market value after 7 DOING IT OVER AGAIN TODAY Salomon Brothers scandal in the 1990s. Apple, Exxon, Google and Microsoft, FRUGALITY Buffett, who stepped in as chairman and ahead of Johnson & Johnson and of Salomon Brothers after manage- General Electric. Notable businesses TAXES AND RELOCATION ment resigned, tells Congress that he within Berkshire are GEICO Insurance, COPYCATS AND COMPETITION FOR BERKSHIRE has instructed employees to behave as Burlington Northern Railroad and INFLATION though their actions will be reported by consumer-product companies such as PROSECUTION OF BAD ACTORS an informed and critical reporter on the Fruit of the Loom, Dairy Queen and S&P 500 INDEX VS. HEDGE FUNDS front page of the newspaper for all their See’s Candies. Berkshire also holds friends and family to read. Lose money multibillion dollar investments in JUNE 2014 MAY 3, 2014 MEETING Wells Fargo, Coca-Cola, American and would like to get more of them. [In for shareholders. [Buffett and Munger Express and H.J. Heinz, among oth- contrast, the members of Berkshire’s make only $100,000 per year in com- ers. Readers are encouraged to study board receive almost no compensation pensation. Though the amounts are Buffett’s annual letters to sharehold- for serving ($900 for each meeting in not disclosed, many other executives ers for their wealth of business and person, $300 for each telephonic meet- at Berkshire are highly compensated investment wisdom, which are available ing, and $1,000 per quarter for each based on their results and incentive at www.berkshirehathaway.com. member of the Audit Committee.) programs devised by Buffett.] Buffett They may be friends of Buffett, but promised to write about the appropri- COMPENSATION PRACTICES AND the Berkshire directors are financially ate compensation for Berkshire’s future BOARD BEHAVIOR independent.] leadership in the next annual report. The day’s first question was why Buffett has served on the compensa- Berkshire abstained from voting tion committee of a board only once. He H. J. HEINZ AND 3G CAPITAL; BOOK against the executive compensation explained that compensation commit- RECOMMENDATION plan at Coca-Cola. Buffett explained tees look for cocker spaniels with their In 2012, Berkshire partnered with that although he isn’t a fan of the tails wagging rather than Dobermans. 3G Capital to acquire H. J. Heinz. recent compensation plan at Coke, he Objecting to everything that differs Asked if Berkshire would adopt the expressed his displeasure through an from one’s own opinion would not be cost-cutting practices of 3G or do abstention and a private communica- effective within the board structure (or future deals with 3G, Buffett offered tion with Coke CEO Muhtar Kent society). Reflecting on the social nature that 3G does a magnificent job of run- rather than voting no or going to war of boards, Buffett asked how often you ning businesses in a very lean style and with the company. would invite someone to dinner who that he expected to see more opportu- A later questioner wanted to know belched loudly at each occasion. nities to partner with them. Berkshire why Buffett’s son Howard, who now As for Howard Buffett’s position has a somewhat different style in run- serves on the Coke board, had not on the Berkshire board and his even- ning businesses and wouldn’t try to pushed to alter Coke’s compensation tual role as Chairman, Warren Buffett combine its approach with that of 3G, plan. Buffett, an experienced board explained that Howard would not be but Berkshire doesn’t love overstaffing member having served on 19 corporate there to run Berkshire as CEO, but to either. Buffett recommended “Dream boards including the Coca-Cola board facilitate a change in CEO should that Big,” a book that chronicles the rise of at one time, explained that boards are ever be needed. Munger agreed that the Brazilian trio behind 3G Capital. partly business and partly social orga- Howard Buffett is an excellent choice Buffett cited the 3G team as being nizations. Only rarely can a board in that role. Howard is knowledge- smart, determined, never satisfied, hard member vote against the flow of board able about business, Berkshire and its working, very good at removing unnec- opinion or the recommendation of a unique culture, and his father’s ways of essary costs, and not over-promising or subcommittee charged with a particu- thinking. over-reaching. Buffett said that Heinz lar responsibility. To a later question, Buffett com- will file 10-Qs so its financial reports Despite appearances to the contrary, mented that proxy statement disclosure will soon show the improved cost struc- many board members aren’t really inde- of compensation for top executives at ture under 3G. pendent at all, as they receive $200,000 corporations had the opposite of its to $300,000 per year for serving. Most intended effect. No board wants to BERKSHIRE’S BENCHMARK OF directors enjoy their current positions admit its officers are mediocre, and PERFORMANCE no CEO benchmarks himself against Buffett uses the growth in Berkshire’s Without the the lowest paid CEO, so compensa- per-share book value as a rough mea- tion plans constantly escalate with the sure of its increase in intrinsic value. public disclosure, help of public disclosure and the com- His goal is for this measure to exceed parisons that ensue. Without the public the return of the S&P 500 Index over corporate CEOs disclosure, corporate CEOs would be time, but it failed to do so over the last would be making making a lot less money. five years, as the stock market return Berkshire gives the minimum disclo- was very high from the bottom of the a lot less money. sure of its executive comp and doesn’t bear market. From the market peak in intend to change, as it wouldn’t be good late 2007, Berkshire has done quite well 2 BROWN ADVISORY BERKSHIRE HATHAWAY ANNUAL SHAREHOLDER MEETING NOTES MAY 3, 2014 MEETING against the market. Berkshire’s business progress in any intrinsic value. Buying back stock at more than intrinsic one year will tend to underperform a strong stock market, value hurts shareholders. match a moderate stock market and outperform a weak At some point in the future, Berkshire will generate market. Over longer periods, Buffett expects Berkshire to more cash than it can deploy to create value for sharehold- outperform the equity market. ers. Berkshire’s test for retaining capital is whether a dollar of capital retained creates more than a dollar of value for Berkshire stands ready to shareholders. Whatever Berkshire decides to do then will be in the shareholders’ interest. buy back stock at up to KEEPING TRUST WITH MANAGERS; OPERATING ON 120% of its book value. DESERVED TRUST Asked how he keeps the trust of the managers of the Munger thinks this is a ridiculous yardstick, but Buffett businesses that Berkshire acquires, Buffett answered that likes to climb high mountains. Book value growth for Berkshire keeps the promises it makes. As long as a busi- Berkshire is after a full tax rate on earnings where there are ness makes money and doesn’t have labor problems, even no taxes assumed on the S&P 500 Index return.